Bharti Airtel Ltd has lost about $3.58 billion (Rs14,770 crore) in market value since the admission that it’s in talks with African operator MTN Group Ltd for a possible stake in it. The main concern of the market is that the $18-$20 billion required to gain the majority (51%) control of the company would strain Bharti’s finances and lead to a substantial equity dilution. These are typical first reactions to large deals, visible even in Tata Steel Ltd’s purchase of Corus.
But there are some other significant concerns related to the possible purchase. Much has been talked about the replication of Bharti’s successful low-cost model in MTN’s markets. But an analyst with a large US-brokerage based in South Africa says that such talk is too simplistic. MTN operates in 21 countries, each with different demographic profiles. Some markets have a population of less than a million, while some others have a population of less than five million. It’s unlikely that Bharti can expect the same benefits of economies of scale it does in India.
What’s more, despite having entered a number of small markets recently where economies of scale are difficult to come by, MTN had an Ebitda (earnings before interest, tax, depreciation and amortization) margin of 43.5% in the year till 31 December 2007. Bharti’s Ebitda margin stood at 42.1% for the year till 31 March.
Simply put, with operating margins already so high, how much can Bharti improve them? Some analysts are questioning what Bharti may be bringing to the table. In fact, citing that the African firm had higher revenues and profit, one business daily in South Africa had an editorial titled, “Maybe MTN should be taking over Bharti”.
News reports suggest that MTN investors may not budge unless the offer is increased to about 200 rand per share, about 21% higher than the possible bid price of 165 rand as reported by the Financial Times. This is way higher than analysts’ estimates for the firm—Citigroup, for instance, has a price target of 150 rand on MTN. In sum, while the synergies are questionable, even the valuation may leave little on the table for Bharti investors.
Salary rise contained, but still high
The pace of increase in employee costs appears to have slowed in fiscal 2008, if data culled from the results of 719 non-financial private sector companies are to be believed.
These companies’ employee costs, which had gone up by 30.8% in fiscal 2007, rose by a much lower 22%. But while the deceleration in employee costs may be welcome, it’s still not low enough to be cause for comfort. That’s because employee cost as a percentage of net revenues for these companies has risen from 6.75% in fiscal 2007 to 7.02% in the 12 months ended 31 March this year. As a matter of fact, this ratio is the highest in the last four years. Clearly, while revenue growth has tapered off, growth in salaries and wages has not decelerated to the same extent.
The results are slightly different for the companies in the financial sector. A sample of 190 of these companies shows that the percentage of employee expenses to total income has risen from 6.21% in fiscal 2007 to 6.34% in fiscal 2008.
The difference is that the pace of increase in employee expenses continued to rise in the last fiscal year, gaining 50% in that year compared with 44.5% in the previous year. If current market conditions continue for the next few months, however, the trends in financial sector employee costs will fall in line with those in the rest of the private sector.
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