BHARTI & MTN DEAL

Introduction:

Bharti Airtel (BSE: 532454) formerly known as Bharti Tele-Ventures

LTD (BTVL) is the largest cellular service provider in India, with more than 110 million
subscribers as of 2009. With this, Bharti is now the world's third-largest, single-country
mobile operator and sixth-largest integrated telecom operator. It also offers fixed line services
and broadband services. It offers its TELECOM services under the Airtel brand and is headed
by Sunil Bharti Mittal. The company also provides telephone services and Internet access
over DSL in 14 circles. It also acts as a carrier for national and international long distance
communication services. The company has a submarine cable landing station at Chennai,
which connects the submarine cable connecting Chennai and Singapore.

The businesses at Bharti Airtel have always been structured into three individual strategic
business units (SBU's) - Mobile Services, Airtel Telemedia Services & Enterprise Services.
The mobile business provides mobile & fixed wireless services using GSM technology across
23 telecom circles while the Airtel Telemedia Services business offers broadband &
telephone services in 95 cities and has recently launched a Direct-to-Home (DTH) service,
Airtel Digital TV. Shahrukh Khan is the brand ambassador of the mobile company and
Kareena Kapoor and Saif Ali Khan are the brand ambassadors of the DTH Company. The
company provides end-to-end data and enterprise services to the corporate customers through
its nationwide fiber optic backbone, last mile connectivity in fixed-line and mobile circles,
VSATs, ISP and international bandwidth access through the gateways and landing station.

Globally, Bharti Airtel is the 3rd largest in-country mobile operator by subscriber base,
behind China Mobile and China Unicom. In India, the company has a 24.6% share of the
wireless services market, followed by 17.7% for Reliance Communications and 17.4% for
Vodafone Essar. In January 2010, company announced that Manoj Kohili, joint managing
director and chief executive of Indian and South Asian operations, will become the chief
executive of the international business group from 1st of April 2010. He will be overseeing
Bharti's overseas business. Deputy Chief Executive Sanjay Kapoor will replace Mr. Kohli
and will be the CEO with effective from April 1 2010.
 MTN Group is a South Africa-based multinational mobile
telecommunications company, operating in many African and Middle Eastern countries.
MTN describes itself as "the leader in telecommunications in Africa and the Middle East"
(Since 2004, Africa has been the fastest growing mobile phone market in the world.).
Launched in 1994, the MTN Group is a multinational telecommunications group, operating in
21 countries in Africa and the Middle East. As at the end of December 2006, MTN recorded
more than 40 million subscribers across its operations. MTN Group's President and CEO is
Phuthuma Nhleko. The company sponsors the CAF Champions League football competition
as well as APOEL F.C. winners of the Cypriot First Division in 2009 and participants in the
2009–10 UEFA Champions League. The MTN Group operates in: Botswana, Cameroon,
Côte d’Ivoire, Nigeria, Republic of Congo (Congo-Brazzaville), Rwanda, South Africa,
Swaziland, Uganda, Zambia, Iran, Afghanistan, Benin, Cyprus, Ghana, Guinea Bissau,
Guinea Republic, Liberia, Sudan, Syria and Yemen. The MTN Group is listed in South
Africa on the JSE under the Industrial – Telecommunications sector.
Agreement:

The potential deal would be structured as follows:

▪ MTN would acquire approximately a 25% post-transaction economic interest in Bharti for
an effective consideration of approximately USD 2.9 billion in cash and newly issued shares
of MTN equal to approximately 25% of the currently issued share capital of MTN.

▪ Bharti would acquire approximately 36% of the currently issued share capital of MTN from
MTN shareholders for a consideration of ZAR 86.00 in cash and 0.5 newly issued Bharti
shares in the form of Global Depository Receipts (GDR’s) for every MTN share acquired
which, in combination with MTN shares issued in part settlement of MTN’s acquisition of
approximately a 25% post-transaction economic interest in Bharti, would take Bharti’s stake
to 49% of the enlarged capital of MTN. Each GDR would be equivalent to one share in
Bharti and would be listed on the securities exchange operated by JSE Limited.

▪ Bharti would have substantial participatory and governance rights in MTN enabling it to
fully consolidate the accounts of MTN

▪ MTN’s economic interest in Bharti would be equity

The potential transaction, when completed, would be expected to value for Bharti
shareholders due to, among others, synergistic benefits and further diversification of Bharti
income streams into the fast growing and relatively under-penetrated African and Middle
Eastern markets. Just over a third of India’s 1.1 billion population have access to a cell
phone, while MTN operates in virtually untapped markets such as Afghanistan, Sudan, as
well as in Africa, where some analysts believe users could almost double to 700 million by
2013. The merger will lead to a bigger exposure for both companies. With the current
economic recession affecting most of the companies, this increased exposure to the
international market would definitely help them to boost their sales, pushing the combined
revenue further. India and Africa are two of the fastest growing telecommunications markets
worldwide and this merger will ensure that both companies have easier access to these
markets. The deal will also result in Bharti Airtel and MTN having better power and access to
innovative technology. Furthermore, this move will also enhance the existing relations
between South Africa and India. Indian Premier League (IPL) did its bit to improve the ties,
now it is Airtel’s turn.

Given all the benefits that the deal would have, the coming days would be very crucial. Last
time the talks between the two corporate giants had come to a standstill as Bharti Airtel had
refused to become a subsidiary of MTN. Though this year, Bharti is in a stronger position and
MTN will likely have to step down from its previous demands.

The billion dollar deal still faces some hurdles before it is shown the green signal. At the
announcement of the renewed 2009 talks, Bharti’s stocks dropped 6%, whilst conversely
MTN’s lifted by 9%- a factor which may worry Bharti’s shareholders. Also, Telecom
Watchdog, a Delhi based NGO has challenged the deal. It states that under India’s 2005 New
Telecom Policy, foreign ownership and investments in telecommunications interests are
capped at 74%, and should the merger be successful, Bharti will breach India’s foreign
ownership rules.

The coming days would either see the largest non-pharmaceutical transaction to occur in
2009 or should Telecom Watchdog succeed, just a failed merger. The deal if passed, should
lead to a lower call rate and expansion of base by Bharti Airtel in India. Agreed that the
connectivity of Airtel is the best, but the shooting call rates is leading to more market share
being occupied by its main rival, the Vodafone. Also the ZooZoo commercials are doing
wonders for Vodafone. Bharti should come up with some innovative style of advertisement
rather than every time showing all the big-wigs of Bollywood in their commercials. Also they
should reach out more to the youth who comprise the majority of the Indian population. If
adhered to these two vital strategies, the day is not far when Bharti would be the one of the
leading telephone service providers in the entire world.

Overview of Bharti & MTN

Bharti will act as the primary vehicle for both Bharti and MTN for pursuing further
expansion in India and Asia, while MTN will be the primary vehicle for both Bharti and
MTN for further expansion in Africa and the Middle East. Bharti will acquire a 49%
shareholding in MTN, which along with its shareholders, will acquire an economic interest of
approximately 36% in Bharti, out of which 25% will be held by MTN and the remainder by
its shareholders. The combined entity will have a customer base of 200 mn subscribers (100
mn subscribers each of Bharti and MTN) and combined revenues of over $20 bn. Bharti will
act as the primary vehicle for both Bharti and MTN for pursuing further expansion in India
and Asia, while MTN will be the primary vehicle for both Bharti and MTN for further
expansion in Africa and the Middle East. As per the proposed scheme of arrangement, MTN
will acquire a post-transaction economic interest of approximately 25% in Bharti for an
effective consideration of about $2.9 bn in cash and newly-issued shares of MTN, close to
25% of the currently issued share capital of the South African firm. Bharti will acquire
approximately 36% of the currently issued share capital of MTN from its
shareholders for a consideration of ZAR 86.00 in cash and 0.5 newly issued shares of Bharti
in the form of Global Depository Receipts (GDRs) for every acquired share of MTN which,
in a combination with MTN’s shares issued in part settlement of its acquisition of a post
transaction economic interest of approximately 25% in Bharti, will take the company’s stake
to 49% of MTN’s enlarged capital. Each GDR will be equivalent to one share in Bharti and
will be listed on the securities exchange operated by JSE Limited, South Africa. Bharti will
have substantial participatory and governance rights in MTN, thus enabling it to fully
consolidate the company’s accounts. MTN's economic interest in Bharti will be equity
accounted and the company will enjoy appropriate representation on its board. Singapore
Telecommunications, Bharti’s major existing shareholder, will continue to be a strategic
partner and a significant shareholder after the implementation of the potential transaction.

The proposed deal is expected to provide Bharti access to the under penetrated African and
Middle East market. However, the story is a bit different for the other geographies. Africa’s
demographic profile is quite different from that of the rest of the world, with some markets
having a population of less than 1 mn and others having a population of less than 5 mn. There
are regions (marked in blue in graph below) with a high GDP/per capita, but with a mobile
penetration of over 80%, thus leaving little scope for further expansion. There are also
regions (marked in yellow in graph below) with very low mobile penetration, but having a
very low GDP/per capita (less than $1000). It still remains to be seen as to how Bharti will
implement its low cost model in Africa. What is noteworthy is that these nations have a
GDP/per capita that is even lower than that of India at $1016. The regions marked in green in
the graph below have the maximum potential for growth, due to their moderate GDP/per
capita and significant scope for increase in mobile penetration.
Shareholding pattern of Bharti & MTN post deal
Bharti’s shareholding structure

Bharti Telecom (Mittals*, Vodafone* and Singtel*) was the major stakeholder in Bharti,
before the transaction with a 45.3% stake. Singtel also had a direct stake of 16% in Bharti.
There are stillvspeculations over the shareholding pattern, post the deal, which will enable
Bharti to obtain FDI clearance for the deal. A possible shareholding pattern, post the deal,
could be one in which Bharti remains the major shareholder, but with its stake diluted to
29%, followed by the MTN Group with a stake of 25%.
The proposed deal with MTN will provide Bharti access to markets across the Africa and
Middle East that are under penetrated and have a relatively higher ARPU in comparison to
that in India. With Indian service providers already struggling against declining ARPUs and
stagnating subscriber additions, Bharti views the deal with MTN as an additional source of
revenue generation over the long term. However, MTN already has 100 mn subscribers and
its geographies with a high GDP/per capita are already saturated. Bharti will, thus, find it a
tough task to increase the number of subscribers in geographies with a low population and
GDP/per capita. There are regions, such as Nigeria, Iran, Syria, which have potential for
growth, though the amount of value addition from these regions for Bharti still remains to be
seen. Since MTN operates across 21 geographies, there could also be integration issues and
delay in unlocking of synergies between the two entities. The deal will also result in a
significant earnings dilution for Bharti over the short term, which could have a significant
negative impact on its stock price.
Research by Indiainfoline % Sharekhan reports:

India Infoline research team-Bharti Airtel would buy nearly 36% stake in MTN in a cash-
cum-stock offer. It would pay ZAR86.0 per share in cash and 0.5 newly issued Bharti shares
in the form of GDRs for every MTN share acquired. Bharti’s offer values MTN at a 36.6%
premium to its 22 May closing price. In turn, MTN and its shareholders would acquire 36%
stake in Bharti. MTN would acquire approximately 25% of Bharti for a consideration of $2.9
billion in cash and a fresh issue of ~25% MTN shares. Coupled with fresh MTN issue and
36% stake buy, Bharti’s total stake in MTN would be about 49%. The two companies have
agreed to discuss the potential deal on an exclusive basis with one another till 31 July. We
estimate Bharti may have to raise debt to the tune of $3 billion as net cash outgo of $3.9
billion on the deal may require additional borrowings. However, FCF of ~ $500 million and
comfortable net D/E of 0.2x in FY10E leaves sufficient headroom for the company.
Considering the scope of MTN’s operations, integration issues and the need to avoid open
offer in India may further complicate the deal. For now, we retain our MARKET
PERFORMER rating on the stock with a target price of Rs776.

Sharekhan-In terms of long-term strategy, the deal makes sense for Bharti as it provides the
company entry into 13 fast growing and under-penetrated countries of Africa. The company
is also poised to benefit from the huge scale and operating metrics (higher average revenue
per unit [ARPU] and margins) of MTN, which is better than that of Bharti. However, the
broad contours of the deal leaves ambiguity about the extent of dilution in Bharti’s equity
capital to acquire 49% stake in MTN. Also, the deal will result in around $4 billion of net
cash outflow from Bharti (this is in addition to $4-5 billion the company will require for 3G
auction and other normal capital expenditure in the current year). Another area of concern is
that the deal would be earning per share (EPS) dilutive for Bharti in the next couple of years.
We would wait for further and finer details of the deal. In the meantime, we maintain Buy on
the stock and putting price target under review. At the current market price, the stock is
trading at 15.5x its FY2010E earnings and 8.6x its enterprise value (EV)/earnings before
interest, tax, depreciation and amortization (EBITDA).
Case Details:

The deal will also result in a significant earnings dilution for Bharti over the short term,
which could have a significant negative impact on its stock price. Merger talks between
emerging markets giants Bharti and MTN have been called off once again, after the two firms
failed to convince the South African government – MTN’s biggest shareholder – on the
benefits of the deal. In a statement released Wednesday, Indian operator Bharti Airtel said it
has decided to disengage from discussions with the MTN group when the exclusivity period
ended on September 30. Talks between Bharti and MTN began in May and have been
extended twice, only to end once again without resolution. An earlier round of talks between
Bharti and MTN, in 2008, was unsuccessful; with Informa analyst Matthew Reed noting that
a reported factor in that failure was South Africa’s worry that control of MTN, which is
perceived as a national champion, could pass into foreign hands. South Africa’s
communications minister has more recently made comments about the proposed alliance that
suggest that the South African government’s support for the deal is not certain. The South
African government is MTN’s biggest shareholder, with a 21 per cent stake, through the
Public Investment Corporation, a state pension fund. The proposed transaction would have
been the single largest foreign direct investment into South Africa and one of the largest
outbound FDIs from India, but Bharti said the government of South Africa has expressed its
inability to accept the merger in its current form. “We hope the South African government
will review its position in the future and allow both companies an opportunity to re-engage,”
Bharti said.

Mergers fail largely because expected synergies take a longer time to deliver, or the price is
too high, or there is no one completely in charge. In the Bharti-MTN case, all three apply.
First, 49 per cent will not give Bharti unhindered control. Second, paying $4-5 billion in cash
means it will take several years to amortise the cost. Third, synergies will not come till the
people, culture and branding issues are addressed, and that will take some doing.
India’s telecom major Bharti Airtel and South Africa’s MTN Wednesday terminated their
talks for a proposed $24-billion equity swap-cum-strategic alliance that could have
potentially created the world’s third largest mobile phone enterprise. According to Bharti, the
proposed deal was called off after the South African authorities declined to accept certain
regulatory constraints on the part of both sides. The main hurdle to the deal was dual listing
of the post-alliance entity, which the South African authorities were pushing for, but was not
permitted by the present Indian regulations. The South African government was pushing for a
dual listing since it would have allowed MTN to retain its national character.

Dual Listing:

A dual-listed company or DLC (also referred to as a Siamese twin) is a corporate structure

which involves two listed companies with different sets of shareholders sharing ownership of
one set of operational businesses.

A dual listing of a company is a way for a company to have two equal listings (neither being
a secondary) in different markets. The usual way in which this is done is by creating an
ownership structure of two holding companies, each of which is listed in a different market.
These then own 50% each of the group of companies that is the actual business.

In a conventional takeover one business acquires the shares of another. However when a
DLC is created, both companies continue to exist, and to have separate bodies of
shareholders, but they agree to share all the risks and rewards of the ownership of all their
operating businesses in a fixed proportion, laid out in the equalization agreement. The
equalization agreements are set up to ensure equal treatment of both companies’ shareholders
in voting and cash flow rights. The contracts cover issues that determine the distribution of
these legal and economic rights between the twin parents, including issues related to
dividends, liquidation, and corporate governance. Usually the two companies will share a
single board of directors and have an integrated management structure. A DLC is somewhat
like a joint venture, but the two parties share everything they own, not just a single project.

The commonest reason for a dual listing is a need to list in two different countries. This may
happen because of:

• A merger of companies listed in different countries, or,

• A new listing to gain access to capital from a larger market.

The companies that are already listed in their home country which, as they get bigger, find it
useful to have access to the larger amounts of money they can raise in larger markets. In the
interests of their existing (home country) shareholders they need to retain their original
listing.

The importance of some dual listings has diminished a little as it has become easier and
cheaper for even private investors to trade in foreign markets. Dual listed companies have
special corporate governance requirements. The interest the shareholders in each of the listed
companies have in the business is the same. This is usually addressed by guaranteeing equal
rights in all respects (most importantly voting rights and dividends) and by an appropriate
management structure (such a unified board). This implies contracts between the two listed
companies and appropriate internal structures within each company.

Some problems can occur with dual listings. For example:

• the shares may trade at a discount in one market,

• the shares may be less liquid in one market,

• The complex legal aspects of the structure may add bureaucracy.

Dual Listing is not allowed in India and it will need major amendments to key corporate laws
of the country. Some of the examples are as follows:-

1. The existing Companies Act and its proposed successor would both need to be
amended. In the case of a dual listed company, an investor can buy shares in one country and
sell it in an overseas market. That would need the Indian rupee to be fully convertible,
something that the central bank is yet to allow.

2. The Foreign Exchange Management Act (FEMA) too would need to be amended. Besides,
domestic trading in shares denominated in foreign currency cannot happen without the
permission of the Reserve Bank of India.

3. It will need permission for trading of shares denominated or expressed in a foreign

currency (if shares are expressed in Rupee and shares of foreign company are expressed in
local currency, the equalization will be disturbed). Therefore, it may be necessary to permit
trading of shares expressed in a common currency, say dollar.

Capital Account Convertibility:

If the central bank makes domestic currency fully convertible on capital account of balance of
payments then the foreigners have the freedom to purchase both physical and financial assets
in the domestic market and the residence have the freedom to purchase both physical and
financial asset in the foreign market. In other words there is liberalisation of inflow and
outflow of foreign capital in the domestic country. The financial market such as money
market, capital market, & FOREX market are opened out for foreign residence. This is
international integration of financial markets. Therefore the outcome of capital account
convertibility is globalisation of financial market.

The IMF (Indian Monetary Funds) had permitted all the central banks to make their currency
fully convertible on current account since 1990 onwards but capital account convertibility
was included in legal frame work of IMF in 1995. Therefore according to this since 1995
onwards it is obligatory for all the central banks of member countries to make their currency
fully convertible on capital account of BOP.
The CAC makes the FOREX market unprotected form all the speculators. Therefore there is
always risk of instability of financial market under fully convertibility of currency on capital
account .The entry point for the speculator is FOREX market. They enter this market by
increasing supply of foreign currency therefore exchange rate become unstable is downward
direction. Then they convert foreign currency into domestic currency and enter the capital
market. In this market they purchase the securities of selected domestic companies. These
speculators also enter the domestic money market and sell domestic currency at higher rate of
interest. This also creates instability in the call money market and rate of interest. Therefore
under capital account convertibility domestic financial system is adversely affected.