Court­ing giants

Multi-bil­lion dol­lar flirt­ing with In­dia’s Bharti Air­tel cosy for both par­ties

Finweek English Edition - - Communication & Technology - SI­MON DIN­GLE si­mond@fin­

THE AN­NOUNCE­MENT last week by MTN that it was again in talks with In­dian telecom­mu­ni­ca­tions gi­ant Bharti Air­tel to dis­cuss a share-trade and po­ten­tial merger has been met with mixed re­views from the mar­ket. MTN’s share en­joyed an im­me­di­ate rally on the news but the mar­ket ra­tio­nalised later in the week when more de­tails emerged. Though the deal would clearly be of mu­tual ben­e­fit to both com­pa­nies per­haps an all-out merger would be a step too far.

“Some are run­ning the num­bers and there are a few ques­tion marks about both par­ties rais­ing their debt lev­els higher than the com­fort lev­els of cur­rent in­vestors,” says Ves­tact’s Sasha Naryshkine. “I think if the deal were to go ahead with Bharti, the secondary list­ing could be a com­pelling buy – in part be­cause you get the In­dia busi­ness full freight, plus you get al­most half of MTN.”

Ir­re­spec­tive of what the mar­ket makes of the deal the pro­posed re­la­tion­ship be­tween MTN and Bharti makes good sense in terms of both their ex­pan­sion­ary plans.

Bharti Air­tel is the world’s third largest mo­bile op­er­a­tor. The part­ner­ship be­ing pro­posed with MTN would see Bharti ac­quir­ing a 49% share­hold­ing in MTN, in re­turn for a 36% eco­nomic in­ter­est in Bharti. The longterm in­ten­tion is to merge the com­pa­nies.

The pro­posal sug­gests 25% of the in­ter­est in Bharti be held by MTN, with the re­main­der go­ing to MTN share­hold­ers. Both say it’s been agreed to dis­cuss the po­ten­tial trans­ac­tion ex­clu­sively un­til 31 July this year.

Daniel Tor­ras, a prin­ci­pal at the Jo­han­nes­burg of­fice of Delta Part­ners, says the deal will be of tremendous ben­e­fit to both com­pa­nies but won’t be without its chal­lenges. “Those will be largely re­lated to cor­po­rate gov­er­nance and how trans­ac­tions of this size take place. My feel­ing is that MTN and Bharti have learned from last year’s failed at­tempt. It seems sen­si­ble to start with mi­nor­ity takes in each other to be­gin with and a full merger later on.”

MTN would cer­tainly be un­able to pen­e­trate the In­dian mar­ket without a player such as Bharti on board. The African cel­lu­lar gi­ant has learned from its Ira­nian op­er­a­tions that com­pe­ti­tion is stiff in the Mid­dle East and that dy­nam­ics are wholly un­like any­where else in the world.

Tor­ras says In­dia is a tough mar­ket. While it’s emer­gent in na­ture, it’s steadily ma­tur­ing. “Mo­bile pen­e­tra­tion in In­dia is around 40%, with 400m sub­scribers out of a pop­u­la­tion of 1,1bn. It would be very dif­fi­cult for MTN to start a green­fields op­er­a­tion, ac­quire new li­cences and roll out from scratch in In­dia com­pet­ing with Bharti Air­tel. The dy­nam­ics on the ground are also dif­fer­ent. For ex­am­ple, there’s a cul­ture and his­tory of out­sourc­ing that’s more pre­dom­i­nant in In­dia than in Africa.”

Bharti owns an in­fra­struc­ture com­pany and many of its own tow­ers and Tor­ras says it also has in­no­va­tive agree­ments with its net­work providers, whereby it pays fees on net­work us­age.

“Those are just some of the things MTN could learn from and maybe even de­ploy here in Africa,” Tor­ras says. “And if we look at the ben­e­fits for Bharti – be­sides the ob­vi­ous – an ap­peal­ing as­pect would be learn­ing from MTN’s ex­pe­ri­ence in ex­pand­ing into new mar­kets and fields. Bharti has tried that be­fore and hasn’t been so suc­cess­ful. But MTN has proven it can be done with its launch in Iran and many ac­qui­si­tions.”

Tor­ras sug­gests Bharti could also help with MTN’s short­age of se­nior man­agers to run its op­er­a­tions in var­i­ous ter­ri­to­ries, along with tech­ni­cal staff to as­sist in net­work roll- outs and main­te­nance.

Bharti is also in­volved in a con­sor­tium in­stalling sub-marine ca­bles be­tween Europe and the Mid­dle East. The ca­ble con­nects In­dia to Europe un­der its Europe In­dia Gate­way (EIG) project. The $700m ini­tia­tive will be com­pleted in 2010. MTN is al­ready in­vested in EIG, which in­di­rectly for­wards con­nec­tiv­ity to other ca­ble projects, such as the East African Sub­ma­rine Ca­ble Sys­tem (Eassy).

“MTN could cer­tainly lever­age its po­si­tion with Bharti in driv­ing com­pet­i­tive ad­van­tage,” says Tor­ras.

You also shouldn’t over­look the fact Bharti is in­volved with one of the six sub­ma­rine ca­bles pro­vid­ing new band­width links to Africa. Hav­ing exclusive ac­cess to that re­source could be a pow­er­ful dif­fer­en­tia­tor for MTN.

The po­ten­tial deal be­tween MTN and Bharti Air­tel eclipses the trans­ac­tion we saw be­tween Voda­fone and Telkom. Some have sug­gested it would be worth US$23bn. Given the action by SA reg­u­la­tor Icasa and labour union Cosatu with re­gard to the Vo­da­com deal, Icasa’s po­ten­tial role can’t be down­played.

Icasa me­dia and stake­holder li­ai­son man­ager Sek­goela Sek­goela says: “Ob­vi­ously, they’ll have to ap­proach us. At the mo­ment we don’t have enough in­for­ma­tion at our dis­posal to be com­ment­ing on the deal. For now it’s just talk. We must ex­er­cise some form of cau­tion and wait un­til we’ve been ap­proached by the par­ties in­volved.”

In a ra­dio in­ter­view, a Cosatu spokesman sug­gested this sit­u­a­tion is very dif­fer­ent from the Vo­da­com deal, which saw a for­eign com­pany take con­trol of a South African busi­ness. As such, the trade union isn’t con­cerned at this stage.

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