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Bharti—MTN: The Deal Dynamics

02 June, 2009
For a business that believes in reducing distances and making people feel closer, staying at home naturally seems unappealing. The Bharti-MTN deal may kick off a new round of telecom consolidation globally as the world gets smaller for the telephony goliaths. It seems that the confidence is returning to the financial markets and good deals can and would get funding. The Indian telecom sector has seen a significant increase in competition over the past 12 months at various levels due to expansion by large established players.
 
Given the speed of mood changes in the Indian financial markets due to a combination of factors, it seems M&A activity is making a comeback faster than expected. The Bharti-MTN deal in the making and a flurry of pharma deals in recent months indicate that even in the current global economic environment, there are big opportunities for companies to do strategic M&A.   
 
The deal makes strategic sense for Bharti as it opens up the fast growing African continent and could fetch combined revenues of $20 bn through a combined subscriber base of 200 mn. The Indian telecom sector saw a significant increase in competition in the past 12 months. This competition is expected to further increase due to the expansion by large, established players from CDMA to GSM, expansion by existing GSM into new circles and new greenfield operators looking to launch operations over the next 12-18 months.
 
The competitive intensity is expected to further increase due to the expected launch of 3G and mobile number portability. The combination of these factors is expected to drive down ARPU’s and MoUs as pricing cut remains an important tool to gain market share. This would result in a sharp slow down in the profitability of Indian Telcos in the near future.  
 
Bharti has always harboured international ambitions on the solid foundation of domestic business and the current environment actually rekindled the flame ignited last year. Bharti’s confidence stems from their marketing success in India which it believes would work very well in Africa. In both places, around a third of the population owns a mobile phone, and the monthly ARPU can be low. In these circumstances Bharti’s ability to quickly sign up new subscribers with innovative marketing schemes can reap benefits in the African continent as well.  
 
Whether the deal would walk the tight rope of FDI regulations will only be clear in the days to come.  This deal will be the first in the telecom sector to test the new norms for foreign investment announced under Press notes 2, 3 and 4 in February 2009. As per Bharti’s announcement it would acquire 49% in MTN and, in turn, MTN and its shareholders would acquire 36% economic interest in Bharti, of which 25% would be held by MTN and the remainder held directly by MTN shareholders.  
 
This complex, cross-holding deal will be a combination of cash and stock swap. The funding of the transaction is not likely to face any hurdles but the regulatory hurdles both at the South African and the Indian level could derail this strategic combination. At the Indian level, although under the new FDI press notes, various structures could be possible to surmount the 74% foreign ownership issue, what could be worrisome is that RBI seems to be largely countering the new FDI norms.
 
The deal structure could see MTN taking around 10% stake at Bharti Telecom with the issue of new shares to MTN along with a combination of equity shares, convertible instruments, warrants at Bharti Airtel level to MTN and MTN sherholders under a Scheme of Arrangement. What seems unclear is the role Singtel will play in the deal, having said that the deal structure could also involve Bharti telecom or its promoters floating an SPV (76:24 or 51:49) along with Singtel which can then raise funds, including bridge loans.  Currently there is a lot of speculation on deal structure and the Indian corporates will watch the transaction as it unfolds. 
 
At the South African level, the deal may face regulatory hurdles if past events are an indication.  The South African court had to intervene to permit UK’s Vodafone to acquire a controlling stake in Vodacom after local regulators revisted their decision to clear the Vodacom deal. Media reports indicate that even at MTN’s private sector shareholder level, there seems to be some dissonance whether the deal with Bharti is in MTN’s best interests. 
 
Having said that, and given that the final outcome on the deal will only be known around July 31, 2009, this deal is a harbinger of imminent consolidation in the Indian and global telecom sector. The confidence is returning to the financial markets and good deals can get funding.
 
There are attractive targets at current prices and for the time being, private-equity firms may be more enthusiastic sellers than buyers. They can create a big opportunity for companies to do “strategic” M&A—buying their weaker rivals and cutting costs. It seems this economic downturn will make weaker firms more willing to accept offers than they were in good times. Marrying a strong suitor is definitely a more appealing prospect than a lonely death.
 
-Sanjay Sakhuja, CEO-Ambit Corporate Finance & Vinod Wadhwani, Director, Ambit Corporate Finance 
 
(Views expressed in this article are personal)

 


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Bharti—MTN: The Deal Dynamics

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