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Concerns on Conquest

Bharti Airtel making yet another attempt to take over MTN has not been well received by investors

Slowdown or not, it seems that the spirits of Indian corporates are as gung-ho as they were in 2007 to go for overseas expansion, if they find an opportunity that is mouth-watering enough. This one in particular evokes more than just a sense of déjà vu. It also makes you think of bargain hunting.

Telecom major Bharti Airtel (‘Bharti’), India’s largest telco, insatiable still despite the stupendous growth it has logged in such a short time to recently cross the 100 million subscribers mark, is again looking to shop abroad. The company announced on May 25, that it has renewed its efforts for a partnership with the MTN Group, Africa’s largest telco. Last year, truce was called when talks broke down on the issue of who would buy whom — Bharti wanted to buy a controlling stake in MTN  while MTN proposed to make Bharti its subsidiary. The arrival of Reliance Communications on the scene further helped scupper the deal.

This time it’s a much more complex deal, but one which looks to be tilted in favour of the Bharti Airtel as it would end up paying substantially less than what it had proposed last year — Bharti had indicated about its willingness to pay $19 billion for a 51 per cent stake in MTN.

The new proposal, it came from Bharti Airtel, involves a cash-cum-share swap which will ultimately result in Bharti acquiring a 49 per cent stake in MTN, and in turn MTN shareholders will get a 36 per cent economic interest in Bharti.

The deal is worth $23 billion (in cash and stock), if it goes through. In case it does, the combined entity would be the world’s third-largest telecom services provider with a subscriber base of over 200 million, after UK-based Vodafone and China Mobile. The combined entity will have revenues close to $20 billion.

But the deal did not go down well with Indian investors — Bharti's shares fell 5.41per cent on the day it made the announcement. Markets were worried about the fact that with $1.5 billion of cash on the balance sheet Bharti is likely to seek the $4.1 billion net cash outflow ($7 billion that Bharti must pay in cash minus $2.9 billion it will get from MTN) for the deal through debt. This will increase the debt burden on its balance sheet.

Although the deal could benefit Bharti Airtel shareholders in the long-run, but there are concerns over the dilutions of earnings of investors post-merger. As per the deal, apart from the cash payment Bharti will be issuing half-a-new share in the form of Global Depository Receipt (GDRs) for every MTN share acquired. MTN will be paying around $2.9 billion in cash and newly issued shares of MTN equal to approximately 25 per cent of its currently issued share capital for the 25 per cent post-transaction economic interest in Bharti.

According to Brics Research, earnings per share (EPS) of the merged entity will fall to Rs 44.6 and Rs 48.9 in FY10E and FY11E respectively while prior to the deal the estimated EPS of Bharti comes to Rs 50.1 and Rs 54 over the same period.

It is unclear whether the deal will be able to pass through some major legal hurdles. As per the new Foreign Direct Investment (FDI) rule, the deal can go through only if Bharti both ‘owns’ and ‘controls’ MTN and the ownership spans a minimum stake of 51 per cent. However, the deal is in line with Indian law, where FDI cap is in place for telecom sector at 74 per cent. There are also concerns over minority shareholders of MTN playing spoilsports. It has been reported that the some stakeholders (Allan Gray, Polaris and PIC) are not too excited about the deal.

If the deal goes through it will be in the interest of both companies as there is no overlap of operations and that means they can concentrate on aggressive expansion. Bharti, which has already established itself in the Indian market can accomplish its global expansion plans through this deal at minimal cost. It will give it a chance to spread itself into countries like Africa, which are high-growth countries after India and China. Also, MTN enjoys better EBIDTA margins as compared to Bharti and with a presence in super-growth areas like Nigeria, it will help Bharti maintain overall growth rates at acceptable levels.