Getbhavcopy: Free NSE and BSE data downloader

We have already seen 2 India-centric mega acquisitions in the last bull-markets of 2006-07 that have placed India firmly on the elite financial maps of the world. The TATA CORUS deal was probably the first time since the discovery of spice route in the medieval times that Indian businesses reached out to the world to create a trans-continental conglomerate of gigantic proportions. But despite TATA creating a global steel company, it has not actually made great business sense to most investors. The same is true with TATA’s acquisition of JLR & LANDROVER, which have only added debt to the company’s balance-sheet. On the other hand, the other major deal in the Indian telecom space has actually yielded tangible results to the European acquirer. VODAFONE having acquired HUTCHISON has not only added value to its global telecom presence but also has started making money in the Indian markets; unlike the TATAs deal across Europe.

It is in this background that Indian telecom companies have started looking towards the world so as to create global businesses that can challenge the world order. Indian telecom companies have surprisingly chosen a South-South collaboration of historic proportions in their quest of global dominance. Thus Cape of Good Hope has again taken its centre-stage in Indian outreach to the world across the Indian Ocean. BHARTI & RCOM had both tried to acquire MTN of South Africa in the past but had both failed. Now BHARTI is sparing no efforts to take a big stake in MTN, even if it means letting go of a big chunk of its own company.

If the BHARTI-MTN deal does go through, it would be the biggest deal in the Indian context amounting to about 23 million dollars! BHARTI would acquire 49% of MTN and in turn give a stake of about 36% to the South African telecom company. BHARTI, having had the experience in India would now go to another emerging market in the African continent where it can theoretically use its expertise of low margins & high volumes in order to generate greater revenues over the long term. BHARTI would acquire MTN at a rough valuation of about 5.5 times EV/EBITDA; which can be termed as cheap. Wait, there is more... MTN’s revenues are growing at about 40% whereas BHARTI’s revenue growth rate is at about 28%, EBITDA margins are also higher for MTN than BHARTI, ARPU is also obviously higher for MTN. Is that enough? Well, there is more ... MTNs balance sheet (which I was lucky enough to take a sneak peek in June through a friend at a Bangalore based brokerage firm) is surprisingly debt free and not leveraged either. Furthermore, MTN has a big presence in 25-30 odd countries spanning a whole continent (which has a lower mobile penetration than India) unlike BHARTI which is an India centric player. So, at the outset this appears a win-win deal for BHARTI, right? Then, why are Indian markets so jittery about this deal?

Mergers & acquisitions are never so simple as merging 2 balance sheets or exchanging stock stakes between 2 companies. Let me examine the complexities of the BHARTI-MTN deal in part 2 of this essay.

P.S: I am writing this, even as Pakistan seems to be working its way back into the game (154/3) & Nehra has been brought back into the attack ... Can India win this game? It all increasingly depends on Sachin Tendulkar, in the absence of Yuvraj & Sehwag.

Tatas may have had their business reasons for acquiring Jaguar/Landrover and Corus but it is evident now it didnt make any real value addition to Tatas. They need more money to fund the payments. Tisco has been the lowest cost producer of steel.

I find it strange that an Integrated steel manufacturer like TISCO has a market value of 500(PE of 8) whereas a secondary steel manufacturer like Bhushan sells for 1300(PE 13).

Waiting for second volume of your essay.

Mergers and acquisitions are always dicey business that can make or mar a company in the eventual analysis. History would judge this deal (if it goes through) in only two ways;

• Either this will become an epoch making decision which finally elevated an Indian born company into a global giant

• Or this will be defined as that decision which tanked one of India’s biggest indigenous creations, in its quest for global presence.

BHARTI-MTN deal looks fabulous at the outset but has many problem areas that might eventually prove to be a big obstacle for the merged entity. To begin with let us look at the AIRTEL experience being replicated elsewhere. It is no doubt that BHARTI has great expertise in generating revenues through low ARPUs by playing the volume game, but many of the MTNs markets have a population in the range of 1 to 5 million thus proving that BHARTI’s AIRTEL experience in India might not be of any great value in its endeavour in the African continent. In any case, the management team at MTN won’t be tinkered with, at least for next 2-3 years (as a pre-condition for the deal by South African Govt.) negating any chances of implementing the high volume – low margin business model perfected by BHARTI.

Next the argument that the deal is cheap for BHARTI at 5.5 times the EBITDA valuation of MTN can be de-bunked because of the inherent nature of the geo-political realities of Africa. Nigeria and other countries where MTN has a presence are not ideal places for doing businesses because of the political uncertainties which could mean sudden regime changes and policy shifts. In fact, this has been one of the primary reasons why no other telecom majors of the world have evinced interest in MTN.

The theory that MTNs books are debt free and that makes a case for BHARTI to acquire a stake in it is turned over its head because of the immediate realities of the Indian market. BHARTI will have to pay for 3G spectrum and also incur capex for rolling out new services in order to remain relevant in its original market of India, which would mean taking additional debt by using the MTN balance sheet. Thus BHARTI would pay about 7 million dollars to acquire 49% stake in MTN and would hen incur debts of about 9 million dollars to roll out new services and also as payment for 3G services in India using the balance sheet of MTN! That makes little sense! BHARTI, at this juncture can ill afford to neglect its parent market of India as we have already seen that RCOM has been increasing its customer base at a higher rate than AIRTEL. Also TATA with its partnership to DOCOMO is making big moves and has become the fastest growing telecom major in the last month.

Thus, BHARTI-MTN deal does not make sense either in the short term or in the medium term. There are people who might argue that the deal makes sense in the long run because it creates a major telecom entity south of equator, which is a facile argument because in the long run anything is possible and markets do not take such considerations. If the market reactions are ranging from cautious to negative to this deal, it is justified and taking any positions in BHARTIARTL as of now could prove to be suicidal (in either ways).

P.S : Why do India manage to lose way between the innings? Are we so weak in our bowling department? Now what happens? This is a very diffucult match to win now ... If we do win (courtesy Tendulkar) then this would prove to be one of India's biggest wins ever (especially while chasing)

Correction 9 & 7 Billion dollars rather than million dollars as stated above

Nice essay. I do not see why Bharti should try to copy its high vol low margin strategy in MTN markets. What is the need if MTN is already better off. Further the population bases of such markets are smaller than our own. And how would Bharti raise finances on MTN balanc sheet? And where? In India or elsewhere?

WE will keep losing matches if only Tendulkar has to save always. So when he goes out at any stage most of the people leave the TV sets and return in 40th over to see if there still is any hope. As long as we have bowlers like Ishant RP and Harbhajan who score 7 runs an over without a bat our batsmen will not be able to maintain the strike rate. The matches become as uncertain as  toss of a coin. Unfortunately despite having some of the best and record holder batsmen in our team we are seldom comfotable chasing a target of 260-275+. Pakis are very happy. Check any bulletin board.

What about our markets. I could see many downthrusting signals and even Nifty promises to go lower tomorrow. Your views?