Summary
The Bharti-MTN merger made eminent market sense on paper, but was frustrated by details of the deal structure. Now MTN has to focus on its operations while Bharti will be seeking another target.
Analysis
Unless they were working entirely on the basis of success fees the twice thwarted Bharti-MTN deal has been good for the investment bankers and other advisers involved. The deal seemed to make sense, appearing to offer growth as well as scale to both operators. However MTN offered Bharti more growth options than the other way round. Bharti essentially comprised a single asset (in India) with substantially lower average revenue per user (ARPU). MTN’s ARPU has been running at R136 in South Africa (about $18), or $11 group-wide, while Bharti’s has been Rs278 (R44 or just under $6). On the other hand Bharti’s business model, with its strong emphasis on outsourcing and infrastructure sharing, offered valuable lessons to MTN on how to be profitable in very low ARPU markets. Another incentive for the deal is that there were strong incentives among MTN’s management to find ways to accelerate extracting value from unvested options, although these would not necessarily be in the interests of other shareholders. It is noteworthy that in the second attempt to make a deal with Bharti a price of R130-R136 per share was considered acceptable, while in the first attempt MTN was looking for R180 per share. Opposition from the Government of South Africa to the deal on the grounds of nationalism has been cited as a reason why it fell through. But it is more likely that it was financial considerations inherent in the structure of the deal that played a key role. Large shareholders as well as the Treasury and the new Minister of Communications in South Africa realized that global depositary receipts (GDRs) are not worth much to South Africans. The convertibility of the rupee in India was the main obstacle, with the Finance Ministry there being unwilling to change the entire capital market structure to allow for dual-listings. Now that the deal has fallen through it can be expected that Bharti will be looking for other opportunities. Zain, which has been reported as being available, is one that is mentioned. For its part MTN will have to focus on improving its operations in light of mounting pressure to introduce long overdue changes in the South African regulatory environment as well as to improve performance in some of its other mobile businesses such as in Sudan and Nigeria.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
