The Indian telecom sector doesn’t seem to have lost its sheen for overseas players, the world economic slowdown notwithstanding. Its enduring appeal was in evidence again this April, when South Africa’s MTN and India’s Bharti Airtel announced their decision to revive merger talks. The sector watched with interest and anticipation as the two telecom majors put a lid on past differences and returned to the negotiating table in an attempt to reach a merger agreement that could potentially lead to the creation of a telecom behemoth, the third largest in the world.
This is the second attempt by the two companies to get together. Last year, at about the same time, talks between the two companies had floundered on several counts, including regulatory hurdles in India for Airtel, as its foreign shareholding would have breached the permissible 74.5 per cent limit, Singapore Telecommunications (SingTel) and Vodafone already being shareholders in the company. Control of the new entity also became a sticky point, with MTN proposing that Airtel become its subsidiary, which did not go down well with the Indian telecom major.
Aware of the pitfalls of the past and the stringent regulatory terms in the country, the two companies are treading cautiously this time around. They have issued individual statements on the negotiation proceedings, cautioning that the discussions are at an early stage yet and may or may not lead to a deal at the end.
The caution is well advised. There are several details that need to be ironed out in this “very complex deal” that is worth $23 billion and involves a mix of cash and shares. What is reportedly being considered at the moment is that Airtel will pay, in cash and shares, for 49 per cent of MTN while MTN will pay cash and stock to acquire approximately 36 per cent economic interest in Airtel, of which 25 per cent will be with MTN and the rest will be directly held by MTN shareholders.
According to analysts, the deal is expected to be structured in such a manner that MTN will get shares in Bharti Telecom, the holding company of Bharti Airtel, or its parent Bharti Enterprises, or in both. Taking this route, Bharti Airtel will be able to file the deal as a “scheme of arrangement” under the Indian Companies Act, which will exempt MTN from having to make an open offer. SingTel will continue to be a strategic partner and significant shareholder after the implementation of the potential transaction. MTN and Airtel have agreed to discuss the transaction exclusively with each other until July 31, 2009.
The broader objective is to achieve a full merger of MTN and Bharti over a period of time. Meanwhile, the deal, if it goes through, would create a $61 billion telecom giant, according to current market valuation, with annual revenues of over $20 billion and a telecom footprint extending across India, the Middle East and Africa. In terms of user numbers alone, the merged entity, with over 200 million subscribers, would rank third in the world after China Mobile (477 million subscribers) and the Vodafone Group Plc (303 million subscribers), and would be way ahead of AT&T and many large European telecom companies.
Sunil Bharti Mittal, chairman and managing director of Bharti Airtel, stated: “We are delighted at the prospect of developing a partnership with MTN to create an emerging market telecom powerhouse. Both companies would stand to gain significant benefits from sharing each other’s best practices in addition to savings emanating from enhanced scale. We see real power in the combination and we will work hard to unleash it for all our shareholders. This opportunity also represents a first of its kind in developing an Indian-African initiative that would serve as a shining example of SouthSouth cooperation.”
Airtel has clearly been eyeing Africa as an attractive investment opportunity for some time. In an interview, Mittal had indicated that as the telecom market of this region is somewhat less penetrated in the global telecom context, he saw great potential in this emerging market. Given Airtel’s limited global presence at present, a tie-up like this would give it a definite edge internationally.
For MTN too, a tie-up with Airtel would be useful. It would give it access to the world’s fastest growing telecom market. In a statement, Phutuma Nhleko, chief executive, MTN, said, “The deal would create a highly visible commercial partnership between South Africa and India.” He also pointed to the fact that Africa and India are the growth engines of the global telecom industry, with the subscriber base of both companies swelling to 100 million each.
Indeed, a tie-up would allow both companies to gain ?? in terms of better pricing power in the market, lower costs on account of shared infrastructure and resources, and better purchasing power with suppliers. Also, with new mobile applications and services being offered to subscribers, there would be a gradual increase in the average revenue per user (ARPU). Notes Bundeep Singh Rangar, chairman of IndusView Advisors, an India-focused cross-border advisory firm, “The companies will be buying international scale and growth in the world’s fastest growing telecom markets of India and Africa.”
The market is already talking about the possible merger as India’s biggest crossborder deal, worth almost twice the value of the acquisition of the UK’s top steel-maker Corus Group Plc for $12 billion by India’s Tata Steel in January 2007. It would also surpass the acquisition of Hutchison Essar, then India’s second largest GSM mobile service provider, by the UK’s Vodafone Group Plc for $11 billion.
“This one deal, worth $23 billion, will almost match the value of the 280 crossborder mergers and acquisitions last year at $25 billion. It marks the grand entry of India as an acquirer in the international telecom industry,” says Rangar.
Still, behind all the good cheer, there are underlying concerns. Industry analysts feel that while the deal will be a good strategic decision in the long run, Airtel’s balance sheet will come under considerable pressure in the short term. The company’s stock prices declined somewhat following the announcement, showing that the Sensex does not see short-term gains in big merger proposals. The fact remains that investors are worried about equity dilution and the “significant amount” of debt that Airtel will have to take under the proposed terms of the deal.
But as Dr Mahesh Uppal, director, ComFirst, points out, “In these times of recession, Bharti Airtel is perhaps better placed to drive a bargain than MTN as India’s telecom market has displayed that it is relatively recession proof. Besides, Airtel has higher cash flows than most global companies. MTN, on the other hand, is vulnerable as it is more impacted by the global recession.”
MTN certainly does have its share of concerns. None of MTN’s major shareholders has publicly endorsed the proposed deal. In fact, the company’s biggest shareholder, South Africa’s state-owned pension fund Public Investment Corporation (PIC), reportedly told Reuters that it was still analysing the transaction.
According to industry experts, the terms of the deal being considered would not be very attractive to MTN shareholders. In fact, an international leading business daily has reported that “the South African shareholders are not too happy and have decided to wait and see as it still does remain a complex deal”.
While negotiations are still at a preliminary stage, the industry is following the proceedings with great interest. Speculation and debate are rife as to how the deal, if it comes through, could lead the way for other Indian telecom companies to drive their consolidation plans.
Terms of discussion
The negotiations include the following principal elements:
