Bharti and MTN Deal Biggest M&A Activity in India’s History
Flow of the Presentation
Bharti Enterprises •
• • • •
• •
•
Bharti Enterprises is one of India’s leading business groups with interests in telecom, retail, manufacturing, agri business and financial services.Bharti Airtel, is Asia’s leading integrated telecom services provider with operations in India and Sri Lanka. Bharti Airtel has been at the forefront of the telecom revolution and has transformed the sector with its world-class services built on leading edge technologies. In financial services, Bharti is partnering with AXA of France to offer life insurance, general insurance and asset management. Bharti Retail, the 100% subsidiary of Bharti Enterprises operates multiple format consumer friendly stores. Bharti Wal-Mart, is a B2B JV with Wal-Mart for wholesale cash-and-carry and back-end supply chain management operations. The other businesses in the group are Beetel for communication and media devices and Bharti Del Monte India, a JV with Del Monte to offer fresh and processed fruits & vegetables in India as well as international markets.
MTN
A global communications partner and world-class cellular network.
The MTN Group Limited (MTN Group) is a leading provider of communication services, offering cellular network access and business solutions. The MTN Group is listed in South Africa on the JSE under the Industrial – Telecommunications sector. • • •
• • •
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.
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.
MTN South Africa Brand •
The MTN South Africa brand was successfully relaunched with the “GO” campaign, which received a number of accolades including the Markinor Top Brands Survey and theLoerie Awards for advertising. There were also significant improvements in customer service levels. This was ratified by the Ask Africa Orange Index Survey, which named MTN South Africa the leading customer service provider in the telecommunications industry.
•
As part of the increased focus on improving capacity to deliver on the business strategy,MTN South Africa has been restructured into a functional organisational design. This has resulted in revised sales and service, marketing, and strategy and business development departments being implemented. This structure has been supported by a number of senior appointments. MTN South Africa has also entered into an information system outsourcing contract to gain access to a broader pool of skills.
• •
The South African mobile communications market is a highly competitive and rapidly changing environment. Included in the range of new competitors are four broadband suppliers and the imminent entry of two fixed-line operators.
• •
A number of innovative and customer focused products were introduced over the year: MCharge, MTN’s virtual recharge mechanism, was revamped to increase the availability of MTN airtime. This, together with introducing R5 as MTN’s lowest airtime denomination, is targeted at dormant and low-usage customers. Two new pricing plans, PAYG call per second peak and peak maximizer reposition, were introduced and are designed around peak use and targeted at high ARPU prepaid customers.
Bharti-MTN deal biggest M&A activity in India's history
The proposed $23-billion mega deal between Bharti Airtel and South Africa's MTN would be the biggest ever M&A transaction involving an Indian company. The potential value of the Bharti Airtel-MTN deal, which would involve a complex structure in which both the entities would pay cash and stock for stakes in each other, would amount to $23 billion. This would be the biggest M&A deal involving an Indian entity, prior to this the largest deal by an Indian company so far has been Tata Steel's takeover of European steel major Corus for $12.2 billion. This is followed by British telecom giant Vodafone's purchase of controlling stake in Indian mobile service provider Hutch Essar for about $10 billion. As per the exploring agreement, MTN and its shareholders would acquire around 36 per cent economic interest in Bharti Airtel. While, the Sunil Mittal-promoted Bharti Airtel would acquire 49 per cent stake in South African telecom giant MTN
According to global consultancy major Grant Thornton Partner and Head, Mergers and Acquisitions Pankaj Karna, "If you have the capital and an organisational mindset to manage them, the downturn represents a great time for M&A as long as you play it close to your core business and leverage on your market knowledge and sector strengths."
India Infoline Research Team •
• • •
• • •
Bharti Airtel would buy nearly 36% stake in MTN in a cash-cumstock 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
Strategy •
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.
Summary
Thank You….