Bharti-MTN deal largest Indian cross-border corporate merger

NEW DELHI, INDIA & LONDON, UK: The potential merger of India's largest GSM mobile telecom service provider Bharti Airtel Ltd and South Africa's largest telecom company MTN Group Ltd highlights the attractiveness of fast-growing telecoms markets in India and Africa and reinforces India Inc.'s global ambitions undeterred by the worldwide economic slowdown.

"The companies are buying international scale and growth in the world's fastest growing telecoms markets of India and Africa," said Bundeep Singh Rangar, Chairman, IndusView Advisors Ltd, the India-focused cross-border advisory firm. "This one deal worth $23 billion will almost match the value of the 280 cross-border mergers and acquisitions last year at $25 billion. It marks the grand entry of India as an acquirer in the international telecoms industry, just as previous years saw India Inc. buy into international steel, auto and IT industries."

"It shows what a catalyst a stable government with an unencumbered policy toward economic liberalization can be," he added. Earlier, the people of India had voted in favour of the Indian National Congress led United Progressive Alliance (UPA) in the month long General Elections for the 15th Lok Sabha or the House of the People, for a second consecutive term, which is an affirmation of the government's economic policies of continued liberalization and represents a vote for stability and continuity.

The merger of Bharti and MTN will be India's biggest cross border deal at almost twice the value of the acquisition of UK's top steel maker Corus Group Plc for $12 billion by India's Tata Steel Ltd in January 2007. It also surpasses the acquisition of Hutchison Essar Ltd, India's second largest GSM mobile service provider then by the UK's Vodafone Group Plc for $11 billion, by more than a similar margin.

A winning deal
The Bharti Airtel and MTN Group combine will create a leading emerging market telecom operator with more than $60 billion in market value, revenues of about $20 billion and over 200 million subscribers. The combined entity will be amongst the top five service providers globally with operations spanning more than 23 countries in Asia, Middle East and Africa.

The new entity will enjoy better pricing power in the market, lower costs on account of shared infrastructure and resources, better purchasing power with suppliers, doubling up of subscribers to 200 million that will gradually result in more average revenue per user (ARPU) as new mobile applications and services are offered to them.

Global telecom companies are drawn to India's market estimated to grow to over 650 million subscribers by 2012 from 360 million currently as 10 million new subscribers are added each month. Africa's telecom markets are dominated by mobile phone subscribers at more than 360 million accounting for 90 percent of all subscribers, growing at around 40 percent per year.

Traction in telecom M&As
The telecom sector has been a significant driver of merger and acquisition (M&A) deals in India accounting for the highest share of deals at 18.6 percent and 22 percent during the last two years with values of $5.7 billion and $11 billion in 2008 and 2007, respectively.

"The deal will add the much needed traction to the deal flow in the country this year encouraging other companies to pursue their growth ambitions that had been stalled owing to the downturn," added Rangar.

The total number of M&A deals during the first four months of 2009 at $2 billion against $9.43 billion during the corresponding period last year illustrates the impact of the economic slowdown.

The string of investments in Indian telecom companies since last year, including, Tata Teleservices Ltd, the telecommunication services arm of India's largest private sector diversified Tata Group by NTT DoCoMo, Inc., the largest Japanese mobile telecom service provider; Unitech Telecom, the telecom arm of India's second largest real estate developer Unitech Ltd by Norwegian telecom firm Telenor ASA, world's seventh largest telecom service provider at $1.36 billion; and Swan Telecom, a start-up GSM telecom service company of a Mumbai-based real estate developer Dynamix Balwas Group by Dubai-based Emirates Telecommunications Corp (Etisalat) at $900 million.

Also, Gulf-based Bahrain Telecommunications Co's acquisition of 49 percent stake in S Tel Ltd, joint venture between Skycity Foundations and Telecom Investments (Mauritius) Ltd for $225 million; and now, South Africa's largest telecom company MTN Group's renewed attempt to enter the Indian market -- are an indication of the fact that there is ample room to enter this market, at least inorganically.

Other international telecom service providers seeking an India entry include Kuwait-based Zain Group, Qatar Telecom, Italy-based Telecom Italia SpA, among others. However, some of the global mobile telecom service providers such as Telefonica SA of Spain, French mobile telecommunication services provider, France Telecom and Deutsche Telekom AG of Germany are among those missing out on the opportunity to tap a market that is projected to offer overall mobile services revenues of more than $37 billion by 2012 growing at a CAGR of 18 percent, according to estimates.

Such growth trends bring with it corresponding increase in investments as government estimates suggest that the overall telecom sector will need $73 billion over the next five years to achieve a tele-density of up to 45 percent. And, a major chunk of the investment is expected to be realized through Foreign Direct Investment (FDI), particularly in the area of mobile communication.

"After the victory of Indian National Congress led United Progressive Alliance (UPA) in the General Elections, the government's pledge to revive the economy from the slowdown with more reforms, will likely see some sectoral regulatory reforms going towards attracting investments in the telecom sector, among others." added Rangar.

It becomes significant as the government has granted new licenses and spectrum to aspiring operators such as Datacom Solutions a subsidiary of one of India's leading consumer durables company Videocon Industries Ltd; and Loop Telecom, a BPL Mobile Communications group company, which are likely targets -- but within the regulatory purview of the overseas entity's stake in the domestic company not to exceed 74 percent.