Friday, May 29, 2009

DEALWATCH: Bharti/MTN: Empire-Building Over Value-Building


NEW YORK (Dow Jones)--As market observers try to parse the byzantine structure of Bharti Airtel (532454.BY) and MTN Group Ltd.'s (MTN.JO) proposed tie-up, one thing is missing: a strong economic case in favor of a deal, whatever the structure.


The proposed arrangement entails the Indian and South African wireless firms exchanging cash payments and issuing new shares. Bharti will end up with 49% of MTN, and MTN and its shareholders with 36% of Bharti. A full merger is the goal "as soon as it is practicable," Bharti said.


The deal's circular structure has analysts disagreeing about the value it puts on MTN. Its enterprise value is currently $30 billion. HSBC argues the deal implies a value of $44 billion for MTN, while Macquarie Research sees $38 billion.


An acquisition premium of 30%, or nearly $9 billion, would not be extreme, should Bharti end up buying MTN outright.


What would Bharti be buying for this? The company points to efficiencies of scale and sharing of best practices. There is reason for skepticism on both counts.


Wireless telecom is a scale business. But both companies are already big, with nearly 100 million subscribers apiece, and lean, with earnings before interest, taxes, and depreciation (Ebitda) margins above 40%. This is profitability that wireless firms worldwide would be proud of.


There could be efficiencies to be harvested in handset procurement, where the same suppliers could be used regardless of the continent where the handset ends up. In networking equipment, on the other hand, operators hesitate to depend too much on any single supplier.


Operating cost synergies are presumably harder to achieve across separate continents. The advantages of increased market share or decreased promotional spending, available in single-market consolidations, are not a possibility.


Consider, for example, Vodafone PLC (VOD). The intercontinental wireless giant's margins outside of Western Europe, solidly below Bharti/MTN levels, don't appear to reflect cross-continental leverage.


Transferring best practices looks even trickier. Will MTS' experience operating 3G networks, or managing the transition to number portability, translate to the Indian market, with its unique regulatory environment?


Bharti's aggressive approach should not come as a surprise. The company has stated outright that multinational expansion is a worthwhile end in itself. Last year, when the first Bharti/MTM negotiations broke down, Bharti stated that the deal structure proposed by MTN was unacceptable because it was not synergistic, but "more importantly," would threaten "Bharti's vision of transforming itself from a homegrown Indian company into a true Indian multinational giant, symbolizing the pride of India."


One might think that a deal should be done only when it offers the best available returns on capital. For Bharti, apparently, things are a bit more complicated, due to patriotic concerns. The same goes for some South Africans. The 49% in MTN was reportedly chosen to keep nominal control of MTN in local hands, and the political aspirations of MTN Chairman Cyril Ramaphosa have been mentioned as a barrier to foreign control.


So the deal negotiations offer the possibility of an acquisition attempt, motivated in part by irrational economic nationalism, being scuttled by irrational economic nationalism.


Both companies have balance sheet capacity and participate in the most robust part of a growth industry where scale matters. Someone should advise them that companies contribute to the health of nations, and their own, by focusing on value. (Source:DJ)

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