Bharti and MTN walk away from merger

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LONDON, UK: Bharti and MTN announced that the proposed $24 billion deal to merge the two companies has fallen apart, four months after restarting negotiations. This is the second time negotiations have failed, after an unsuccessful attempt to merge last year.

This time the South African government failed to give its blessing to the proposed deal structure. In Bharti’s words, “this structure needed an approval from the government of South Africa, which has expressed its inability to accept it in the current form.” Angel Dobardziev, Practice Leader, based in London comments:

A political decision overriding compelling strategic reasons
There were always lots of things that could go wrong with this proposed deal. In the end it seems to have been derailed by political decisions rather than issues of price and/or management control. The South African government was keen not to be seen as ceding control to one of its key national champions.

In order to maintain MTN’s South African identity and to provide cover for potential accusations of ‘selling off’, the South African government required the future entity to have dual listing on both the South African and Indian bourses. Indian law does not currently allow dual listing, and the Indian government was apparently unwilling to make changes to its laws to accommodate this.

After two extensions to the current negotiations, this was the final blow. Bharti was careful to leave the door open for restarting negotiations in the future, although having failed twice it is hard to see this deal being resurrected again.

We maintain that this deal was a good fit strategically and operationally, over and above the issues of economies of scale and complementary footprints. MTN’s strong retail mindset and experience from over 20 different African and Middle Eastern markets would have been a good complement to Bharti’s strong operational experience in network and IT outsourcing, and infrastructure sharing.

For example, MTN was one of the first telcos globally to successfully introduce dynamic mobile pricing and Bharti was one of the first telcos to outsource its IT to IBM on a revenue-sharing model (which has since been replicated by many other telcos) and has recently followed that with a network outsourcing deal with Alcatel-Lucent. For now, all of this remains an academic consideration.

Emerging market consolidation will accelerate
It is interesting to contrast the position of the South African government with that of the Kuwaiti government, which for some time has been keen to sell Zain, either as a whole or in parts.

Leaving aside political considerations, from an investment perspective right now may be a good time to sell an attractive emerging market player. The financial markets are opening up and many stock market valuations have rebounded strongly. There remains a massive interest in emerging market companies as mature market growth has slowed down to a trickle.

Emerging market subscriber and revenue growth is still in strong double-digit numbers, and the leading players have attractive margins. In addition, smart financial investors are looking to cash in their chips while things are still looking good.

However, over the next few years’ competition in many emerging markets is set to rapidly increase due to the entry of new players in the markets and slower subscriber growth as the quality (i.e. higher-spending) market segments start to saturate. This will lead to a slowdown in subscriber and revenue growth, and ARPU and profit margins will decline as a result.

Bharti is a prime example of all of these factors at play in the intensely competitive Indian market –- hence its drive for an ambitious M&A deal in search of growth and diversification.

Other emerging market players such as Reliance, Etisalat, Batelco, Qtel and STC, not to mention Vodafone and Orange, remain on the lookout for M&A targets, so further consolidation and increased M&A activity from strategic investors in the emerging markets will be the norm in the coming year.