The decision of Indian and South African cell-phone giants Bharti Airtel and MTN to revive their merger talks to creating a US$61 billion behemoth - the world's third-largest telecom company - by no means indicates that India's largest-ever transnational deal will survive the hurdles ahead. These include raising as much as $4 billion in bridging finance and Indian regulators concerned at the level of foreign ownership involved. Investors are also worried at just how much can be gleaned from subscribers in territories that include war-torn countries such as Afghanistan, Congo and Sudan. They are also only too aware of recent Indian involvement in other recent mega-deals that have soured badly .
Still, the rewards for a successful tieup between Bharti, already the largest cell-phone operator in India, and MTN, the largest in Africa, would be considerable. A combined outfit would have $20 billion in annual revenue, 200 million subscribers spanning 23 countries in Asia, the Middle East and Africa, according to a statement Bharti Airtel released to the media on May 25. The Bharti-MTN union, expected to involve a $23 billion swap of cash and shares, would be the world's third-largest merger and acquisition deal this year, following the $64.5 billion Wyeth Pfizer and $46 billion Schering-Plough Merck link-ups involving pharmaceutical companies. The two telecom corporations have given themselves until July 31 to reach agreement.
Bharti, led by chairman Sunil Bharti Mittal, and MTN are re-starting negotiations a year after their earlier merger attempt flopped amid disagreement over who got to sit in the driver's seat. On May 26, 2008, Bharti, which claims for itself the title of "Asia's leading integrated telecom services provider", hung out the flag of corporate and national pride when it accounted for the break-up of talks after it was expected to become an MTN subsidiary. "Bharti's vision of transforming itself from a home-grown Indian company to a true Indian multinational telecom giant, symbolizing the pride of India, would have been severely compromised and this was completely unacceptable to Bharti," it said.
Since then, the telecoms industry in India has undergone a transformation as overseas companies have moved into the country to benefit from its still fast-growing market, intensifying competition for Bharti.
In the past year, arrivals include Japan's top cell-phone service provider NTT DoCoMo, Norway's Telenor ASA, Dubai-based Emirates Telecommunications Corp and Bahrain Telecommunications Company. England's Vodafone is also present through its 10% stake in Bharti Airtel, besides being a competitor alongside Tata Indicom.
They are targeting the huge expected growth in subscribers, who are expected to more than double to 650 million-plus by 2012 from the existing 360 million. Bharti this month said it now had 100 million customers, and declared itself to be the world's third-largest single-country mobile phone operator.
Africa also offers huge opportunity, with the number of mobile-phone subscribers, estimated at 360 million, forecast to grow 40% annually. MTN chief executive officer Phuthuma Freedom Nhleko this year signaled his intention to make a "significant acquisition", according to Bloomberg.
Despite Bharti's top executives expressed optimism that they can secure the necessary cash, the company may need a $4 billion bridge loan, raising concern among investors. Bharti Airtel shares wobbled erratically in the Bombay Stock Exchange after news of the re-opened talks, ending on Wednesday down 1.50 rupees on the day at 768.90. The stock dropped nearly 11% in the last three trading sessions, after swinging between a high of 829.80 rupees and a low of 751.00 rupees. Market analysts expect the Bharti wobbles to last until the MTN deal is fully baked.
The MTN deal could increase Bharti Airtel's long-term debt to around $5 billion and boost the debt to equity ratio to over 1 from 0.2 at present. Local business media reported that Standard Chartered Bank could underwrite part of the deal.
Even so, Bharti and MTN have grown stronger in the past year, making them better placed to secure backing. The benefit to Bharti from the year-long delay is put at about $3 billion in the difference between the present and past market value of MTN stock.
"As in the case with any large acquisition, Bharti has to undergo some initial 'pain' through acquiring debt and equity dilution," said Mumbai-based brokerage house Angel Broking in its seven-page detailed analysis of the deal.
While the financing jigsaw is put in place, some complicated equity juggling will be required to maneuver around an Indian government-imposed ceiling of 74% foreign investment in telecom companies.
Essentially, the proposed Bharti-MTN deal would involve:
- MTN paying $2.9 billion in cash to acquire approximately a 25% stake in Bharti.
- MTN handing over newly issued shares worth 25% of its current share capital.
- Bharti acquiring approximately 36% of the currently issued share capital of MTN from MTN shareholders.
- Bharti ending up with a 49% stake of MTN.
In return for this swapping shares and cash, Bharti would have "substantial participatory and governance rights in MTN," according to a Bharti media statement.
Bharti has assured its other major stakeholders, such as Southeast Asian telecom giant Singapore Telecommunications, of continuing "to be a strategic partner and significant shareholder after the implementation of the potential transaction".
Newly sworn-in Indian Finance Minister Pranab Mukherjee welcomed the proposed deal, but Commerce and Industry Ministry mandarins grumbled about current foreign investment ceilings being breached.
Foreign direct investment (FDI) in telecom companies is subject to vetting from the Foreign Investment Promotion Board (FIPB), which the Finance Ministry runs with direct involvement of the Prime Minister's Office.
Since the FIPB is mandated to give its findings on FDI proposals within six weeks, so the regulatory fate of the Bharti-MTN deal could be known by early July. The decision will be awaited with keen interest, as the proposed merger will be among the first to test controversial new guidelines on foreign investment, announced in February, that allow FDI to break through the 74% ceiling (already raised in 2006 from 49%) through the creation of multi-layered investment patterns.
The Reserve Bank of India, among others, is not in favor of the new guidelines allowing the breach of the 74% ceiling in such a key infrastructure sector.
In the Bharti-MTN case, the new guidelines allow regulators to ignore the foreign holdings in parent company Bharti Telecom, which owns 45% of Bharti Airtel, by considering Bharti Telecom as entirely an Indian company since more than 50% of its shares are held by Indian investors.
The past record of the two men steering the deal through this minefield of finance and regulation - Bharti's Mittal and MTN's Nhleko - suggests they are well-qualified for the task and have the ambition to drive it through.
Mittal, 51, an alumnus of Harvard Business School, is one of India's more successful industrialists, has vowed to turn Bharti into "India's finest conglomerate by 2020". Fortune magazine named him "Asia Businessman of Year" in 2007, and Frost & Sullivan declared him "Asia Pacific CEO of the Year" in 2006.
Mittal oversees a diverse technology and infrastructure-focused group with a dozen major companies covering telecoms, realty, retailing, satellite TV, insurance, educational and financial businesses. The group has a reputation for innovation, sustained as recently as May 22 when Bharti Airtel introduced low-cost personal computers at $168 each for its broadband customers in the New Delhi region.
Mittal's prospective merger partner, Johannesburg-born Phuthuma Freedom Nhleko, studied in the US, was a civil engineer with the Ohio Department of Transportation and lists politics and jazz among his interests. Turning MTN into Africa's largest cell-phone service provider has made him one of the continent's top business leaders.
That may not be enough to convince Indian investors recalling the outcome of the recent Tata Steel-Corus and Tata Motors-Jaguar deals.
In 2007, Tata Steel triumphantly spent $12 billion to buy the Anglo-Dutch steel giant Corus. Two years later, Corus, Europe's second-largest steelmaker, faces 3,500 job cuts and is looking for multi-billion dollar bailouts from European governments.
Tata Motors paid $2.3 billion in 2008 for the combined Jaguar Land Rover brands, thinking it could do better with them than previous owner Ford Motor, which accumulated $15 billion in losses in the two years before the sale.
On May 20, a harassed Tata Motors announced that it was raising $840 million in debentures to repay the Jaguar loan and said it was talking to bankers to find ways to repay the rest. A sadder but wiser Tata Group chairman Ratan Tata has since confessed to badly timing his Corus and Jaguar deals.
Yet the timing of the Bharti-MTN deal could be in its favor, with the high growth expected in the Asia-Africa market a stark contrast to expectations in recession-hit Europe and America. Mittal also painted the deal as a pioneering one in more other ways.
"This opportunity ... represents a first of its kind in developing an Indian-African initiative that would serve as a shining example of South-South cooperation," he said.
More domestically, the Telecommunications Ministry portfolio - hugely attractive given the vast amounts of cash the sector develops - became a key bone of contention among coalition partners in the United Progressive Alliance as they squabbled for ministerial berths this week immediately after their parliamentary election victory. The prospect of Asia's first $61 billion telecom company has made the ministry even juicier than previously.
Harit Shah, telecom and information technology analyst at Angel Broking, was confident Mittal and Nhleko would seal the Bharti-MTN marriage at this their second attempt.
"I am fairly certain about the deal being struck," Shah told Asia Times Online. "The two companies are talking exclusively and there are no counter offers this time." Bharti's India rival Reliance Communications also tried to link with MTN last year.
Shah also rejected concern that the Bharti-MTN merger would end in tears along the lines of Tata-Corus and Tata-Jaguar.
"There cannot be comparison between the Bharti and Tata deals because the telecom market is not cyclic in demand as are steel and automobiles," he said. "Tata bought Corus when share prices were too high and demand for steel later dived, whereas both MTN and Bharti are profit-making companies with a good cash flow."
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