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MTN deal not to come easy for Bharti

MTN deal not to come easy for Bharti
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First Published: Wed, May 07 2008. 12 04 AM IST

Updated: Wed, May 07 2008. 12 04 AM IST
New Delhi / Singapore: Bharti Airtel Ltd, India’s top mobile phone services firm by customers, may have made the most ambitious move in its 13 years of existence by initiating merger talks with African operator MTN Group Ltd, but analysts said it would need to wait up to a year before it can, if at all, make progress in negotiations.
That’s because of the interest in emerging market telecom assets from Bharti’s global rivals such as Vodafone Group Plc., China Mobile Ltd and Emirates Telecommunications Corp., or Etisalat.
Both Bharti Airtel and Johannesburg-listed MTN, Africa’s largest mobile phone firm, confirmed late on Monday that they were in preliminary discussions that may or may not lead to a transaction.
Barely a few hours after the announcement, UBS AG analysts Suresh Mahadevan and John Slettevold wrote in a report on Tuesday that the world’s biggest mobile phone services firm, Vodafone; Reliance Communications Ltd, ranked second behind Bharti Airtel in India; and China Mobile may also be interested in MTN. “MTN is likely to attract a host of other suitors which may push up the acquisition price,” said the UBS analysts.
Bharti eyes new networks with MTN (Graphic)
Bharti Airtel has arranged $12 billion, or Rs48,000 crore, of financing to buy a majority stake in MTN, which has a market value of $37 billion, the Financial Times reported on Monday. The Indian firm in a Tuesday statement said no offer in full or part had been ma-de for MTN, which, according to the paper, is being advised by Merrill Lynch and Deutsche Bank. Bharti Airtel has retained Standard Chartered for counsel, the paper added.
“Vodafone is definitely interested in Africa,” Damien Chew, telecom analyst at ING Groep NV, told Mint in a phone interview. “I cannot comment specifically if Vodafone is interested in MTN, but there have been speculations (made in the past).”
What makes MTN attractive to acquirers is its 68.2 million customers across 21 countries, including South Africa, Nigeria, Iran and Cyprus, netting profits of $1.58 billion on revenues of $9.62 billion.
There are three mobile phone firms in South Africa: MTN, Telecom SA Ltd, which offers mobile services under Vodacom brand, and Cellcom Group Ltd. According to an MTN investor presentation made in the third week of April, the African markets of Nigeria, Cameroon, Ghana and Sudan have mobile phone penetration of around 30% currently, which is expected to reach 40% by 2012.
Analysts such as Yogesh Kirve, who tracks telecom at Anand Rathi Securities Ltd, said Bharti Airtel would probably have to settle for a smaller stake than indicated in the Financial Times report. “At (even) 25%, Airtel would still be the single largest shareholder in MTN,” Kirve said. Besides, “raising over $20 billion for almost 50% stake may not be that easy.” According to the MTN website, the group is now 14.71% owned by staff and management through a trust called Newshelf 664. The remaining 85.29% of shares are free-float and held by local and international institutional and retail shareholders.
Shares of Bharti Airtel at the Bombay Stock Exchange fell by 5.29% to Rs846.60 on Tuesday on fears of equity dilution and funding concerns in the bid.
“At around $23.8 a share, MTN is valued at over $44 billion,” said another financial analyst who is not authorized to give media interviews. “We hear that Bharti is offering over $21 a share. What is not clearly known is how much of stake does Bharti want in MTN.”
MTN shares rose 6.7% to 160.10 rand ($21.17) on the Johannesburg Stock Exchange on Tuesday.
Still, some experts said Bharti Airtel, among India’s Top 5 listed firms by market capitalization ($42 billion), was following its high growth strategy and would benefit by exporting its operating model built on tightly controlled costs to the networks it acquires.
Indeed, the firm’s chairman Sunil Mittal, a tenacious New Delhi businessman who fought regulatory and competitor challenges to take his company to the top of the heap, said at a post-earnings conference call late in April: “The business model we have invented at Bharti needs to be transferred globally. We always remain open to opportunities outside India. Now, the company is in a position where it must have ambitions to grow beyond the Indian shores.”
Analysts also say that Bharti needs to expand internationally if it aims to effectively compete with global rivals such as Vodafone and AT&T Inc. “If Bharti wants to become a global telecom player in another 10 years, they will need to explore such options now,” said Jonathan Groocock, telecom analyst at UK-based Investec Securities in a phone interview, referring to the MTN talks. Bharti Airtel currently has an international presence in just Sri Lanka, the Seychelles and the Jersey Islands.
In the year ahead, Bharti Airtel will also have to compete with new operators in India who will launch their services later this year, and could be forced to resort to aggressive pricing in a bid to attract new and retain existing customers. This has put pressure on the company to aggressively seek and develop newer markets beyond India.
For Bharti Airtel, which plans to expand beyond its home market, Vodafone offers a good model to follow. “In the past, companies such as Vodafone have looked to grow outside their domestic markets in order to seek faster and more sustainable growth. Bharti is aiming something similar, except that India is still the fastest growing market in the world,” added Groocock.
Vodafone, which already has a presence in South Africa through its 50% stake in Vodacom, on Tuesday said its interest for new businesses in the region continued. “We continue to look at assets in the eastern Europe, Asia and African regions,” said Bobby Leach, a Vodafone spokesperson, in an email statement. When contacted, a Reliance Communications spokesperson declined to comment on whether his firm would be seeking to make any offer to acquire any stake in MTN. “We cannot comment on this issue,” he said.
Meanwhile, it was not immediately clear how Bharti Airtel, or any other suitor for MTN, would deal with local South African rules that seek to regulate foreign ownership in telecom firms. A senior official at that country’s telecom regulator, the Independent Communication Authority of South Africa, said his country does not permit a foreign operator to hold a majority stake in a local telecom firm such as MTN.
“The local ownership cannot be less than 51%,” he said over phone from Johannesburg, requesting anonymity. MTN spokeswoman Pearl Majola declined any further comment than the firm’s Monday statement. Bharti Airtel’s Mittal was not available for comment.
Andrea Tan works with Bloomberg.
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First Published: Wed, May 07 2008. 12 04 AM IST