New Delhi: After having failed in its attempt to merge with Africa’s biggest phone firm MTN Group Ltd, India’s Bharti Airtel Ltd’s owners might get some relief as stock market investors are likely to applaud the decision to not take on multi-billion dollar debt.
But, Bharti and its ambitious chairman Sunil Mittal now face a bigger challenge: how to find more profitable markets in the face of rising costs and falling per subscriber billing at home, the typical yardstick by which mobile phone companies are valued.
Bharti’s challenges are likely to get compounded if Reliance Communications Ltd, India’s second largest mobile phone services firm by customers, ends up with some sort of relationship with MTN. While it is unclear how deep this Reliance-MTN relationship will be—Reliance has previously talked to MTN in February 2007—any partnership between MTN and Reliance, controlled by billionaire businessman Anil Ambani, could impact Bharti’s own growth plans.
One industry executive, who said he was familiar with the scenario, said both Reliance and MTN are likely to spell out their relationship on Monday. On Sunday, a Reliance spokesman declined to comment on status of talks with MTN. A spokeswoman for MTN said the company is scheduled to make an announcement from Johannesburg before markets open for trading there on Monday.
Bharti said it ended merger talks with MTN after the firm presented the New Delhi suitor a financial structure late on Friday that was “completely different” from what was agreed by bankers representing the two sides a week before, according to a statement issued early on Saturday by the Indian firm.
This structure apparently envisaged Bharti Airtel becoming a subsidiary of MTN and exchange of shares of Bharti Airtel held by its founder Mittal family and Singapore Telecommunications Ltd, or Singtel, in exchange for a controlling stake in MTN. Chairman Mittal’s family is the controlling shareholder of Bharti which has 62 million customers, all in India.
This apparently was not acceptable to Bharti, which “wanted to take the Airtel brand global”, said the industry executive. Analysts interviewed by Mint in the last two weeks had predicted a valuation of up to $50 billion, including debt, for MTN if the merger deal were to happen.
Shares of Bharti will likely rise on Monday, analysts predicted. Ever since Bharti, also India’s third most valuable publicly listed company by market capitalization, said late evening on 5 May that it was “in exploratory talks” with MTN, its shares have shed some 6.5% in value. The shares, which closed trading at Rs893.95 a share that Monday, rapidly lost value, dropping to a low of Rs817.90, or 8.5% less on Thursday last. On Friday, the shares recovered 2.44% to Rs837.65 a share.
The shares could rise partly because of new expectations of a dividend payout to shareholders, said a Mumbai analyst, preferring not to be identified. “Bharti Airtel has either to deploy its cash or refund cash to its investors in one or two financial years,” he said.
Added another telecom analyst: “In the long term, Bharti Airtel’s growth will be determined by the competition and market conditions. Growth will be there, but it is not known whether it will be higher or below (the two million customer additions the firm makes every month).”
The analyst referred to tariff wars, exemplified by firms dropping national long distance call rates to Rs1.30 a minute earlier this month, as a challenge to growth.
Bharti, whose profit growth in the quarter gone by has lagged expansion of revenues, is expected to grapple with cost challenges further in the coming quarters. While annual numbers for fiscal 2008 (profits were 57% higher at Rs6,701 crore from the year before and revenues up 46% at Rs27,025 crore) were very robust, its Ebitda—short for earnings before interest, taxes, depreciation and amortization; a measure of operating profit—margins for the quarter fell by 3.6 percentage points to 35.5% compared with the same quarter of fiscal 2007.
The company had attributed this fall to an increase in expenses on renting towers it uses after the transfer of more than 29,000 towers in its network to Indus Towers Ltd, a tower company it owns together with Vodafone Essar Ltd and Idea Cellular Ltd, last year. Lower call rates and higher marketing expenses too contributed.
Expenses are expected to further increase as Bharti, as also its phone firm peers, expand into rural areas hitherto not connected by phone networks. This entails covering large areas and setting up expensive support infrastructure such as electricity back-ups to run cellular towers.
According to Bharti’s chief executive Manoj Kohli, already one-third of the firm’s new customers come from rural areas (Bharti has been adding more than two million customers a month in the recent past) and this number is predicted to increase to half as early as next year.
Bharti’s ambitions to go global will play out in the next four to five years through acquisitions, said Alok Shende, director of consulting at Datamonitor India, “but not to the scale of MTN”. In Africa, for instance, “Bharti can go country by country, study the markets, as it is a good market for mergers and acquisitions. Then they could create a global conglomerate out of those companies,” he added.
This will be the second attempt by Reliance to try and beef up through deals. The company lost out to Vodafone in an auction for Hutchison Essar Ltd, in part because its advisers didn’t anticipate India’s mobile phone market will continue to expand as rapidly as it has done and the company failed to raise its bid.