BHARTI – MTN

Failed Merger Talks

11/29/10 Bharti – MTN merger 1

 Content
Executive Summary
Industry Analysis

About the Companies

The Previous Affair

The Second Attempt

Management’s Perspective – Why MTN?

Why the talks failed?

11/29/10 Bharti – MTN merger 2

 Executive Summary
• Companies involved:
– Bharti Enterprises Limited: leading Indian
telecom player
– MTN: leading African telecom player
• The deal, had it gone through, would have
been the biggest deal involving an
Indian player
• Two attempts at merger by Bharti and MTN
– First in May 2008
– Second in May 2009
Deal size: approximately
•11/29/10 Bharti – MTN merger
USD 23 billion 3
 Telecom Sector in India
• India has one of the biggest
telecom markets in the world. It
has more GSM subscribers than
fixed-line subscribers.
– Third largest network in world
behind USA and China
– 200 million telephone lines
– Total telecom subscribers –
494.07 million (Aug 2009)
• Very high growth sector:
– Growth rate of 45%,
– Average 9.5 million customers
added every month
• Teledensity –42.27 per cent Source: www.ibef.org
(August 2009)
• Annual growth rate of telecom
subscribers (June 2008–June
11/29/10
2009) –42.68 per cent Bharti – MTN merger 4
 Telecom Sector in India
• Telecom equipment market
(2008–09) –US$ 24.99
billion2,3
• Handset market (2008-09) –
US$ 5.82 billion2,3
• Expected mobile subscriber
base (2013) –About 771
million
• Average Revenue Per User
(ARPU) for GSM (as on 30
June 2009) –US$ 3.801
• Due to increasing competition
in the mobile
communication market, the Source: www.ibef.org
ARPU is consistently
decreasing
• Reduction in tariffs is another
important reason that has
led to a constant reduction
in ARPU though, the gradual
11/29/10decline in ARPU remains well
Bharti – MTN merger 5
supported by the increase in
 Market Share by Players

Players Subscriber O Market

t
her
s,
s ( 000 ’ s ) share
8.
2%
Tat
a
B
ha
r
tiA
i
rte
l,
Bharti Airtel
Te
lese
rv
i
ce118
, ,864
s 22.6% 22.
6%
10
.
9%
Reliance 93,796 17.9%
Communications
I
deaCel
lul
ar,
1
1.
0% Re
l
ian
ce
Vodafone Essar 91,402 17.4% C
om
mu
ni
cat
i
ons,
17.9
%
BSNL B
SN
L,1
2.
0%62,861 12.0%
Idea Cellular 57,612 11.0%
Tata Teleservices 57,329 V
10.9%od
af
one
Es
sa
r,
1
7.
4%
Others 43,284 8.2%

Source: www.wikipedia.com

11/29/10 Bharti – MTN merger 6

 Telecom Sector in Africa
• Liberalisation and Privatisation has spurred
growth in African Telecom sector.
• Fastest-growing mobile market in the
world during the past five years.
• Sub Saharan Africa grew 67% last year
compared with 10% in W. Europe.
• Nigerian mobile market growing at 100%
per year.
• 82 million mobile users in Africa.

11/29/10 Bharti – MTN merger 7

 Market Share by players
Players Subscriber Market
s ( 000 ’ s ) share
Vodafone 80768 18.7%
MTN 77776 18.0% Vodafone,18.7%
Others,22.5%
Zain 49232 11.4%
Millicom
Mobinil 24625 5.7% rnational,
Inte
2.5%
Holding MTN, 18.0%
Orascom 21030 4.9%
Etisalat, 3.2%

France Telecom 19954 4.6G%

lobacom, 4.0%

Maroc Telecom 19222 4.5% MarocTelecom

4.5%
,
Z
ain,11.4%

Globacom 17091 4.0% FranceTelecom,

4.6%
Mobinil
Etisalat 13636 3.2% Orascom,4.9% Holding,5.7%
Millicom 10656 2.5%
International
Others 97796 22.5% Source: http://dataxisnews.com/

11/29/10 Bharti – MTN merger 8

 Opportunities
• Only 6 per cent of African citizens owned a mobile
phone in 2004
– In Asia, North America and Europe, conversely,
mobile phone use approaches saturation
• Low penetration in the interiors
• Major players are MTN, Vodacom, Cellc and Virgin
Mobile
• Less cluttered in comparison to Indian Market
• Soccer World Cup 2010

11/29/10 Bharti – MTN merger 9

 About Bharti Airtel
• Established in 1985
• First basic phone telephone service provider in
India
• Largest cellular service provider in India, with
more than 121 million subscribers as of
January 2010
• World's third-largest, single-country mobile
operator behind China Mobile and China
Unicom and sixth-largest integrated telecom
operator
• Deployed around 23,000 km of optical fibre
cables across the country
• Provides telephoneBharti
11/29/10
services and broadband
– MTN merger 10
Internet access (DSL) in top 95 cities in India
 Business of Bharti Airtel
• Established a submarine cable landing station at
Chennai, which connects the submarine cable
connecting Chennai and Singapore.
• The businesses at Bharti Airtelhave been
structured into three individual strategic
business units (SBU’s)
 - Mobile services
 - Broadband
 - Telephone services(B&T) & enterprise
services
• The mobile service group provides GSM mobile
services across India in 23 telecom circles
11/29/10 Bharti – MTN merger 11
 Net Sales of major Indian
telecom players

11/29/10 Bharti – MTN merger 12

 Challenges for Bharti Airtel
• India centric – Major revenues from
India
• Falling ARPU
• Intense Competition & Shortage of
Bandwidth
• New Players coming in India
• Uncertain Economic conditions
• Mobile Number Portability - upcoming
Challenge.
11/29/10 Bharti – MTN merger 13
 MTN Group - Introduction
 South Africa-based multinational mobile
telecommunications company
 Operates in 21 countries in Africa and the Middle East
 President and CEO: Phuthuma Nhleko.
 MTN Group recorded a 40% increase in revenue to 12.85 bn
USD from 2007
 Sponsor of the 2010 FIFA World Cup to be held in South
Africa
• MTN enjoys a dominant market share across its countries of
operations, being among the top operators in most of its
markets.
• MTN Group divides its operations into three major regions:
– South & East Africa (SEA)
– West and Central Africa (WECA)
– Middle East and North Africa (MENA)
• Majority of its subscribers, revenues and profits comes from
11/29/10the WECA region Bharti – MTN merger 14
 MTN is active in 21
countries
• Afghanistan (Investcom) Ira n ( M T N Ira n ce ll)
• Benin (Investcom) Lib e ria ( In ve stco m )
• Botswana (Botswana N ig e ria ( M T N N ig e ria )
Mascom) R w a n d a ( M T N R w a n d a )
• Cameroon (MTN S o u th A frica ( M T N S o u th
Cameroon) A frica )
• Republic of Congo (MTN S u d a n ( In ve stco m )
Congo SA)
S w a zila n d ( M T N
• Cote d'Ivoire (MTN Cote S w a zila n d )
d'Ivoire)
S yria ( In ve stco m )
• Cyprus (MTN Cyprus)
U g a n d a ( M T N U g a n d a )
• Ghana (Investcom)MTN
Ghana Ye m e n ( In ve stco m ,
S p a ce te l)
• Guinea Bissau
(Investcom) Z a m b ia ( M T N Z a m b ia )
• Republic of Guinea Bharti – MTN merger
11/29/10 15
 MTN Group – Subscriber
base

11/29/10 Bharti – MTN merger 16

 Bharti-MTN deal (2008)
• Bharti approached MTN in early May
2008
• A proposed takeover from Bharti
worth $20 bn for a 51% stake in
MTN
• Combined entity would have been
the sixth largest mobile operator
having subscribers in 25 countries
• Access for Bharti to the unexplored
and still emerging African market
11/29/10 Bharti – MTN merger 17
 Why deal couldn’t get
through?
• MTN proposed a different deal with
Bharti as its subsidiary
• Controlling stake would still have
been with Bharti Enterprises
• Bharti was reluctant to concede
control to MTN
• Would have been against Bharti’s
vision of a global Indian telecom
giant
11/29/10 Bharti – MTN merger 18
 RCom takes the baton
• Bharti’s failure gives RCom a chance
• Enters into a 45-day exclusivity
agreement
• RIL steps in and denies RCom the
merger
• RIL uses first right of refusal to
change the control structure in any
of ADAG companies.


•
11/29/10 Bharti – MTN merger 19
 About the Transaction
• Second attempt initiated in May 2009
• Deal Size: USD24 billion
– USD 10 billion in cash
– USD 14 billion in shares
• Investment Bankers
– MTN: Bank of America Merrill Lynch and
Deutsche Bank
– Bharti Airtel: Standard Chartered and
Barclays
• Talks called off in October 2009
– Investment Bankers lose opportunity to
make USD 48 million
11/29/10 Bharti – MTN merger 20

 Deal Structure
• Step 1:
 Bharti would acquire around 36% of
the current share capital of MTN
 1 share of MTN = ZAR 86 + 0.5 newly
issued Bharti shares
 Total Cash Value = $6.8bn

11/29/10 Bharti – MTN merger 21

 Step 2
 MTN will aquire 25% post-transaction
economic interest in Bharti Airtel
 Bharti will receive 25% of the current
share capital of MTN in part –
settlement of above acquisition
 Balance consideration will be paid out
in cash of US $2.9bn by MTN to
Bharti
•

11/29/10 Bharti – MTN merger 22

 Final Stake
• Bharti would have 49%stake in MTN
• MTN and its shareholders will have
36% stake in Bharti
• Net Cash Paid = $3.9bn by Bharti to
MTN
• Total Deal worth = $23-26 bn


11/29/10 Bharti – MTN merger 23

 Bharti + MTN - The
combined entity


• Particulars FY2010E
FY2011E
• Mobile Subscriber Base (Mn) 237.6
286.6
• Revenues (US$ mn) 13,011
19,415
• EBITDA (US $mn) 5,202
7,733
• EBITDA Margins (%) 40.0
39.8
• Net Profit (US $mn) 2,693
3,723
 Existing EPS (Rs)
11/29/10 Bharti – MTN merger 55.6 24
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Bharti – MTN merger

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Talks fail

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Stock Movement - Bharti

25
 Stock Movement - MTN

First attempt
at merger
Second
attempt at Talks fail
merger again

11/29/10 Bharti – MTN merger 26

 Challenges before the deal

• Arranging cash for financing the deal.

• Payments for 3-G spectrum.
• Shareholder’s concern regarding
dilution of equity.
•
•

11/29/10 Bharti – MTN merger 27

 Management’s perspective

• Additional debt is not an issue as MTN’s

balance sheet is strong with low debt.
• Company has over US $2.1bn on its
books as cash and short term
investments.
• Standard chartered, SBI has shown
interest in funding the current deal.
• Last year, Bharti had received
expressions of support from 12
bankers across the globe to raise
funds of around $60 billion to buy out
11/29/10 Bharti – MTN merger 28
 contd……

• Relaxation provided under the new

norms, allows MTN to pick up 36%
stake in Bharti without breaching the
74% FDI cap in the telecom sector.
• Window of opportunity is closing fast.
Most of emerging markets in
Africa are already controlled by
European players.
• Deal offers substantial long term
advantages and should not be
looked with short term perspective.

11/29/10 Bharti – MTN merger 29
 Why Bharti was keen on the deal
ØIt beats the US telecom giants
Ø
ØBecome MTN’s largest shareholder
Ø
ØGets access to emerging markets

ØGets access to 21 nations

11/29/10 Bharti – MTN merger 30

 What is Dual Listing?
• A dual-listed company is a
corporate structure in which
two corporations function as a
single operating business through
an “equalization agreement”
• The companies continue to exist as
separate firms which share
revenues and profits according to
the agreement.
11/29/10 Bharti – MTN merger 31
 Why the talks failed?
• South African government and MTN
wanted dual-listing of the merged
entity
– Dual listing did not exist in India and
required changes in Securities &
Exchange Board (SEBI) Guidelines
• South African government was initially
against the merger as it wanted to
preserve the African origin of the
company
• The deal breaker was when after 2
months of lobbying, SEBI did not allow
11/29/10 Bharti – MTN merger 32
 References
• Airtel.in
• MTN Annual Report 2008
• Wikipedia.org
• Angel Broking
• Livemint
• Ibef.org


•
11/29/10 Bharti – MTN merger 33