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Bharti's call dropped...or put on hold? - Views on News from Equitymaster

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Bharti's call dropped...or put on hold?
Oct 1, 2009

Bharti Airtel and MTN, two telecom behemoths from their respective nations (India and South Africa) have been in the news for a while now. Over four months to be precise. This was because of the revival in talks of an agreement between the two firms, which had gone sour about a year back. The merger agreement between the two firms was quite complex. A combination of share swapping and cash transactions was proposed. By the end of it Bharti would have nearly 49% stake in MTN, and MTN would have a 36% stake in Bharti. Exclusivity talk periods between the two firms were extended twice during these four months - once each at the end of July and August. September 30th i.e., yesterday was the last day of the exclusivity period. With the management of both the companies keeping mum during the period, a lot of rumours were making rounds. While some favoured the deal, others were no in favour. With no updates being received from either of the companies, and the government claiming to be in favour of the deal, a lot of guesses were being made. This led to a great amount of uncertainty towards the company.

However, late evening yesterday, Bharti released a press release stating that the talks between the two firms have been called off. As per the company, the reason behind the mutual ‘disengagement from discussion’ was the inability of South African government to approve the structure of the deal.

The press release talks mainly about what would have been done (if the deal went through) and very little about the future plans. It reads –"The planned alliance between Bharti and MTN was a vision based on solid fundamentals, which had the potential of creating an emerging markets telecom giant and the third largest telecom company in the world. Substantial synergies could have been captured with this proposed transaction."

However, Bharti’s management has not lost hope of exploring international opportunities to expand its operations. In fact, it has not yet completely ruled out the possibility of a revival in talks with MTN as well. The press release reads – "We hope the South African government will review its position in the future and allow both companies an opportunity to re-engage." As such, one should not be surprised if talks between the two firms may perk up again. As the saying goes – "Third time’s a charm."

Rs 100 Invest on March 9 2009 would be worth
Data Source: CMIE

Considering the uncertainty that was looming over the deal, the stock of Bharti Airtel has underperformed the BSE-Sensex over the past few months. However, investors seemed to have cheered this latest development as the stock was the top gainer on the BSE-Sensex today. While a tie-up with MTN would have been good for Bharti Airtel in the long run, there would have been some short-term obstacles (high-debt and equity dilution, amongst others).

Given that the company was anxious about the merger with MTN for the second time, and also that it is still open to expanding operations internationally does indicate that it expects its domestic business operations to slow down from here on. In addition, given the fact that the company is and will see tremendous competition cannot be ignored.

Further, with the hoopla surrounding the much expensive 3G spectrum auctions, the general consensus is that the new technology is not likely to be as profitable as the current technology. However, one must also note that this was also the case (about general mobile telephony in India) about a decade ago.

What to expect?
At the current price of Rs 436, the stock is trading at a multiple of 13.4 times our estimated FY12 earnings. We maintain our positive view on the stock.

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