Considerable business synergies for Bharti

On The Hindu Business Line on 26 May 26, 2009
BL Research Bureau

Chennai, May 25 Indian telecom players are once again back to wooing MTN, the pan-African telecom operator. After talks with Bharti Airtel (Bharti) and subsequently Reliance Communications failed to produce a partnership last year, Bharti is once again looking to pick up a substantial stake in MTN. The terms of the deal, as discussed till now, suggest that it may involve Bharti having to fork out up to $4 billion in cash net of what it receives for its own shares, to MTN.

Bharti is looking to acquire a 49 per cent stake in MTN, while the latter may pick up a 36 per cent stake in the former. This transaction would entail Bharti receiving $2.9 billion in cash from MTN. But Bharti, in turn, may have to pay out $6.9 billion for a 36 per cent stake, as it involves paying out MTN investors ZAR 86 per share (1 ZAR=$0.12) and 0.5 of freshly issued shares in the form of global depositary receipts for every MTN share acquired.

As of March 31, 2009, the company’s liquid investments: Cash/equivalents and short-term investments totalled around $1 billion. With fresh issue of GDRs, there would be equity dilution for Bharti as well. One positive for the Indian telecom player is that the recovery in its stock price from its low has tilted the valuation in its favour. Bharti’s market capitalisation is now around $32.7 billion, while that of MTN is $28 billion. When the two companies were in talks last May, their market capitalisations were almost the same, at about $40 billion.

Operational gains
From a business perspective, the addition of MTN’s operations appears to be a positive for Bharti. The EBITDA (earnings before interest, tax, depreciation and amortisation) margin for Bharti is around 41 per cent, while that of MTN is 42.2 per cent, according to their latest results.

MTN operates in 21 countries across Africa and parts of West Asia. In many of these countries such as South Africa, Nigeria, Congo, Syria and Cyprus, the average revenue per user (ARPU) hovers at $13-36, much higher that the $6-7 levels in India.

The other key positive is that 99 per cent of MTN’s subscribers are prepaid customers, which means there is very limited possibility of bad debts. MTN delivers 3G services in most of these countries. This knowledge may be invaluable given the imminent 3G rollout in India, with Bharti looking to augment its ARPU by delivering such services as much of India too runs on prepaid basis. The complicated terms of the deal, however, did not go down well in the stock market, with the Bharti Airtel stock falling 5.4 per cent in Monday’s trade.