Mumbai / New Delhi: In a week that India’s biggest mobile phone service company by customers, Bharti Airtel Ltd, expects to make key progress in its merger discussions with MTN Group Ltd, the New Delhi-headed firm’s senior management tried to assuage concerns of investors with large holdings of its shares, which have shed some 7% in value since the two sides announced they had started talks late last Monday.
According to one investment manager, who spoke on phone with a senior Bharti Airtel executive with close knowledge of the merger talks, the Indian firm’s top management agreed there will be short-term pain in the deal to acquire or merge Africa’s biggest wireless services firm on account of multi-billion debt and interest thereupon, but financing structures are available to quickly get out of such high-cost situations.
For instance, Bharti Airtel could merge with MTN and then take the combined company to a US equity listing to raise capital to repay debt, or refinance the debt through low-cost bonds or other forms of debt from Western markets or lenders. With a fast-growing customer base of some 130 million that would rank the merged entity among the Top 5 global mobile phone service firms and more than $3 billion (about Rs12,000 crore) net profits on revenues topping $17 billion, the Bharti Airtel executive argued, both equity and debt options could be easily tapped, according to the investment manager who declined to be identified.
Mint could not independently confirm the firm was exploring such options. A Bharti Airtel spokesperson declined comment.
The attempts by Bharti Airtel, India’s third-ranked listed company by market capitalization, to reassure investors come on the heels of the company’s valuation dropping $3.33 billion between 5 May, the day it announced it was talking with MTN, and Monday.
Another person close to the transaction told Mint on Friday that the company had been offered “billions of dollars” in debt. The Financial Times, which first reported the talks, said Bharti Airtel had lined up $12 billion in debt funds from lenders including Standard Chartered Bank Plc. and Goldman Sachs and Co.
On Monday, Dow Jones newswire, quoting two unnamed people, said Bharti Airtel has contacted West Asian sovereign wealth funds in a search for additional cash to back its bid for a majority stake in MTN.
Some analysts and industry experts have begun questioning post-merger synergies between the two sides. “The companies have disjointed geographical presence,” Yogesh Kirve, telecom analyst at Anand Rathi Securities Ltd, wrote in a note dated Friday. “(With) Bharti’s India strategy not being focused on handsets, we don’t see economies of scale from bulk handset procurement to be of great benefit.” Similarly, benefits from bulk purchase of infrastructure equipment also will be limited, the analyst said.
If two phone operators in the same service area merge, there are synergies and benefits that accrue out of common phone networks, or even a combined sales and marketing operations. In Bharti Airtel-MTN’s case, there are no such obvious synergies.
Further, with profit after tax or PAT of $1.58 billion on revenues of $9.62 billion for MTN, the upside from cost-cutting and enhanced revenues is limited. “With PAT margins of around 17%, MTN is definitely not a turnaround candidate,” said an analyst, who is not authorized to give media interviews, implying a buyout or merger will not come cheap. Earlier on Monday, Emirates Telecommunications Corp. or Etisalat, the United Arab Emirates’ biggest phone company, said it’s evaluating MTN as a potential takeover target.
“Any price between $21 to $23.8 per MTN share is fine, but with more aggressive bidders it could go further up, and make it very tough for Bharti to pull if off,” said a Mumbai-based financial analyst, who, too, did not wish to be named.
Exploring international markets for future growth has been on Bharti’s agenda in recent years. Since December 2006, the company has made unsuccessful bids for a mobile licence in Bhutan and Saudi Arabia, apart from showing interest a 51% stake in Telkom Kenya Ltd in June last year, which was ultimately won by Vodafone Group Plc.
Shares of Bharti Airtel closed at Rs837.95 each on Monday, while MTN shares ended trades at Rand 15,900 boosting the value of the Johannesburg firm to $38.56 billion.
Abeer Allam and Mahmoud Kassem of Bloomberg contributed to this story.