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