SingTel – BT

Bharti’s move seen as risky

Concerns include its funding for deal that could top US$20b if bidding war erupts

Bharti Airtel’s mooted African expansion will look to franchise a model that has made it the leader in the world’s fastest-growing mobile market, and diversify its exposure from an increasingly tough Indian market.

But analysts also see risks in buying into South Africa’s MTN Group – potentially India’s biggest foreign acquisition – with a lack of clarity over Bharti chairman Sunil Mittal’s plans adding to the uncertainty.

Concerns include: How would Bharti fund a deal that could top US$20 billion if a bidding war broke out; how would it integrate a similar-sized company and deal with regulators and customers in 21 countries; and will it be distracted from its home market just as significant changes are underway?

‘MTN is not a small company, and it’s not a cheap acquisition,’ said Rishi Sahay, director of IndusView Advisors.

‘The synergies are difficult to value as they’re different networks, different geographies, and they’re nearly the same size. So you may have to run it like two independent companies, and Mittal doesn’t have much international experience.’

Bharti Airtel, valued at around US$40 billion and more than one third-owned by Singapore Telecommunications Ltd and investment company Temasek Holdings, says it is in exploratory talks with MTN, but has not submitted an offer.

The Financial Times has reported Bharti has bid 165 rand per MTN share for a 51 per cent stake, valuing MTN at about US$37 billion, and has secured US$12 billion in financing.

‘It is more expensive to raise money today than it was a year ago, but maybe because M&A is cooling off elsewhere, it’s a good time for Indian companies to look at opportunities,’ said S Subramanian, head of investment banking at Enam Securities.

India’s wireless market, the world’s biggest after China in user numbers, grew 25-fold between 2002-07, ringing up record profits for telecom firms and attracting global players such as Vodafone, which last year bought a controlling stake in India’s third-largest mobile operator for US$11 billion. Local rival Reliance Communications Ltd is also expanding.

That stellar growth is expected to slow as the percentage of the population with a mobile phone tops 40 per cent by 2010 from 22 per cent now. As the telcos have to seek users in poorer rural areas to increase customer numbers, average revenue per user is likely to fall.

‘There has to be a natural limit to all this, because after a certain point of time, everybody who you think needs and can afford a phone, will have one,’ said Mahesh Uppal, director at telecoms consulting firm Com First.

‘We will have half a billion users by 2010, and after that I suspect the growth has to slow, because you are talking about really marginal users who will come into play.’

Competition is also getting tougher in India. The government recently awarded 120 new telecom licences and wants to allow users to retain their mobile number if they switch operators.

‘A few years down the line, growth opportunities in the Indian market could dry up and, therefore, the telecom companies will have to look overseas for expansion,’ said Yogesh Kirve, sector analyst with Anand Rathi Financial Services. ‘If you go for organic growth overseas, it will be very time consuming.’

If Bharti bought into MTN, which operates in Africa and the Middle East, the combined entity would today have 130 million subscribers, giving it significant leverage with equipment suppliers and handset vendors, UBS analysts said.

MTN had 68.2 million subscribers as of March, compared with Bharti’s 62 million. The South African firm’s annual revenue is US$9.6 billion, against Bharti’s US$6.7 billion, according to Citigroup.

‘We see little by way of synergy benefits,’ said Kawaljeet Saluja and Rohit Chordia, analysts at Kotak Securities.

‘More importantly, growth rates of MTN would be significantly lower than Bharti,’ they said, adding consensus forecasts point to 16.7 per cent annual growth in MTN’s operating profit over three years, compared with a compound annual growth rate of 31.7 per cent for Bharti over the same period.

One Mumbai-based analyst said that could be an opportunity Bharti was looking to exploit, leveraging on its success in India’s emerging market.

‘Bharti is one of the pioneers in bringing down tariffs sharply … yet maintaining strong margins,’ said the analyst, who asked not to be named because of company policy. ‘Once Bharti uses its own efficiency in MTN, the South African firm’s numbers will look much, much better.’

Exporting a business culture to another firm is easier said than done. IndusView’s Sahay said there were not many examples of successful mega telecom deals.

‘Look at Sprint, Nextel,’ he said. ‘However, if Mittal wants to play in the big league, he has to do a big deal. Telecom is so regulated, there aren’t many opportunities. So you don’t know when and where the next one will be.’ – Reuters

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