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Bharti-MTN proposed merger: Our view

May 26, 2009

A year after talks between the two companies ended over issues of cross-holding, Bharti Airtel (India’s largest telecom company) and MTN Group (Africa’s largest) are at it again. They have renewed discussions about forming a partnership, which is essentially aimed to form one of the largest telecom services providing entities in the world. About the companies
Bharti Airtel is India’s largest telecom company having a market share of nearly 25% with over 100 m subscribers. MTN Group, on the other hand, is the largest telecom service provider in Africa and also has presence in the Middle East. The company also has over 100 m subscribers. The merged entity will thus have a combined subscriber base of 200 m and revenues of about US$ 20 bn (Bharti’s FY09 revenues stood at approximately US$ 7.5 bn, while MTN’s revenues stood at approximately US$ 12.5 bn – higher than Bharti on the back of higher average revenue per user or ARPU).

The merger process
Bharti has announced that the merger process will involve a combination of cash and share swap. The deal size is pegged at US$ 23 bn. MTN will be issuing new shares to Bharti, which will be equal to approximately 25% of the current share capital of the former. In addition, Bharti will be acquiring nearly 36% of MTN’s current share capital from its existing share holders for consideration of US$ 6.8 bn. Post the entire transaction, Bharti will have acquired nearly 49% stake in MTN.

In return, MTN will be acquiring post transaction economic interest of 25% in Bharti for about US$ 2.9 bn (plus the above-mentioned share swap). In addition Bharti will also issue 1 GDR (global depository receipt) for every two shares of MTN it acquires. To sum it up, post transaction, MTN along with its shareholders will have a 36% stake in Bharti in the form of global depository receipts (GDRs). These GDRs will be listed on the Johannesburg stock exchange.

It may be noted that the deal is now made possible due to the new relaxations in foreign direct investment rules involving swap of shares. However, the RBI has opposed the new rules and there will be more clarity in a couple of weeks. Moreover, opinion is divided on whether Bharti will have to go for an open offer or not. An open offer is triggered on the acquisition of a 15% stake, but it is not clear what happens if two companies acquire stakes in each other. The deadline for the merger has been fixed as the end of July.

What to expect?
At the current price of Rs 776, Bharti’s stock is trading at a multiple of 12.4 times our estimated FY11 earnings. We had recently recommended a ‘Hold’ on the stock taking into account the company’s strong operation parameters and a robust balance sheet. Post the MTN deal, the situation will of course change as Bharti would have to dilute its share capital and also take on some more debt on its books (net debt to equity currently stands at 0.23 times) to fund the acquisition of a 49% stake in the former. While this will be a short term negative for the existing shareholders of Bharti, the long term advantages of entering a wider market and gaining synergy benefits are expected to be meaningful for the company.

In business terms, this is a great opportunity for Bharti to expand its business to new regions as growth in the Indian market slows down. As per the company’s press release – “Bharti would be the primary vehicle for both Bharti and MTN to pursue further expansion in India and Asia while MTN would be the primary vehicle for both Bharti and MTN to pursue further expansion in Africa and the Middle East.”

Bharti’s management has indicated that the discussions are still at an early stage and may or may not lead to any transaction. Also, the structure and terms of the potential transaction may be adjusted to reflect further discussions between the companies and discussions with lending banks and applicable regulators.

As such, we maintain our ‘Hold’ view on the stock and advice you not to add more of the same to your portfolio given the uncertainty involved. We shall continue to update you more on this transaction and its impact on Bharti as and when the company outlines the progress of the same.

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Feb 17, 2020 03:33 PM


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