From The Hindu Business line on 28 May 2009
(The Indian market does not offer very much in terms of future growth. Fundamentally, the telecom story seems to have played out to a large extent)
Interview with VIVEK GUPTA, PARTNER, M&A PRACTICE, BMR ADVISORS
The first developing-nation foray into the ‘Big 5’ of the telecom world encompassing two fast-growing emerging wireless markets, India and Africa; consolidated post-deal financials, north of 200 million subscribers and revenues of $20 billion; one of India’s biggest cross-border deals, even relative to Tata-Corus or Hutch-Vodafone… These are some of the opening observations about the Bharti-MTN deal that Mr Vivek Gupta, Partner, M &A practice, BMR Advisors, New Delhi, shares with Business Line, during a quick email interaction shortly after the mega merger was in the news. “And the deal is slated to happen this time at fair sensible valuations – in a sense; it is good that the deal was not consummated last year,” adds Mr Gupta. Since May 2008, ignoring the last two days, Bharti’s capitalisation has declined over 5 per cent, while MTN fell over 32 per cent, he notes. “Given the deal terms that have emerged, it seems that the financial side is more or less stitched up, and thus, we believe the deal will likely go through this time.”
Excerpts from the interview:
What are the quantitative parameters of the valuation process, apart from the telecom companies’ subscriber base?
The deal envisages Bharti giving up 36 per cent equity — 25 per cent to MTN and 11 per cent to its shareholders — and $4.1 billion, in return for a controlling 49 per cent stake in MTN. MTN will become Bharti’s “subsidiary by governance structure.” I guess that Bharti may not have immediately pushed for a 50 per cent plus stake, due to regulatory issues around licences, but it does seem apparent that Bharti will be the controlling party.
A number of factors would have gone into the valuation discussions:
Bharti’s revenues of $7.5 billion vs MTN’s $12 billion.
EBIDTA (earnings before interest, taxes, depreciation and amortisation) margins around 40 per cent for both entities but finally, similar net profit numbers.
Bharti’s ARPU (average revenue per user) at around $6.5, with MTN at around $13.
Growth projections for both markets – Africa having relatively higher potential than India.
Relative market capitalisations of both listed entities, with Bharti carrying more generous market multiples.
Finally, the end result of all of these factors is a 30 per cent premium to MTN’s current market capitalisation — an EV/ EBIDTA in the region of sub 6 — a valuation that seems defensible, considering the large 49 per cent block of equity with a “governance structure” in Bharti’s favour.
India and Africa, are there similarities and differences of significance, from a telecom perspective?
Both are developing country markets and thus, have inherent similarities — number of subscribers, contribution of mobile subscribers to the overall telecommunication industry, etc. At the same time, they seem to be at different stages of their growth cycles. The African telecommunication market is estimated to grow at roughly 40 per cent. It is estimated that India will grow for the next couple of years and then will start stagnating, while Africa will potentially continue to show higher growth for four to five years.
On the ARPU front, Africa ranks better than India, at roughly $12 per subscriber as compared to $6 per subscriber in India. Also, as compared to India, in Africa, per-minute prices are higher, demand for SMS over voice is limited because of low literacy levels, and bottlenecks exist in sharing platforms between local operations on account of small populations in some countries, political issues, language barriers and lack of affordable cross-border connectivity.
By 2012-13, convergence is expected. The known factors should take over — increasing competition, price reductions and another wave of low-income customers should drive the ARPU levels down in Africa too. And Indian operators understand this game well — the game of working on high volumes, low margins, the game of building economies of scale, higher affordability and tight management of extensive outsourcing contracts.
Post meltdown, the deal space was barren for quite some time. Does the Bharti-MTN deal signal a recovery trajectory, leading to many more mega deals in other sectors, too?
One way to think about this deal is to really peg it as being independent of market conditions. The fundamental drivers have been there for a while. The lower markets and efflux of time may have helped the deal talks this time from the point of view of more flexibility on both sides to make the deal happen. And thus, we are hopefully in a situation where deal talks have progressed. For this reason, we do not necessarily believe that the announcement of this specific Bharti-MTN deal indicates a strong recovery trajectory in the deal space per se.
As an emerging market merger, does the Bharti-MTN deal have characteristics that may not be found in the developed markets?
The telecom industry has seen lot of transactions globally in the past. They have had different drivers. For example, in December 2006, AT&T acquired BellSouth. It was then estimated that the NPV of the expected synergies would be as high as $18 billion. In two other transactions which took place in 2005, SBC buying AT&T and Verizon buying MCI, the target was to save 20-50 per cent of their total operating costs by reducing the number of networks, thereby eliminating redundant switches, devices, people and buildings. Bharti-MTN is not entirely similar. The fundamental driver seems to be geographical expansion and along the way come benefits of scale and bargaining power.
The two companies could look to each other to add value to their operations and by sharing each other’s best practices. MTN should be able to use Bharti’s technology and techniques for rolling out networks inexpensively and quickly. Bharti will be able to diversify beyond India’s borders, where expanding its base means having to reach out to poorer consumers.
Put differently, from Bharti’s point of view, the Indian market does not offer very much in terms of future growth – 3G and some value-added services may carry some kickers but fundamentally, the telecom story has played out to a large extent. This foray probably is thus an attempt to carry the “telecom story” for the company further by expanding into another potentially high-growth market.
Any other points of interest?
This is the first really large deal that takes advantage of the recent change the Government has announced in what it considers foreign and domestic holding. Now, foreign shareholding in a majority Indian-owned and controlled company is not considered foreign for downstream investments and that offers much greater flexibility in opening up headroom for MTN and its shareholders to acquire stakes in Bharti.
Also, it’s interesting to see that the deal is structured in a way not to have to look at an open offer in India. That would have been a significant cost leakage, given that MTN was picking up more than the 15 per cent trigger limit. The Bharti release seems to indicate that the deal will happen through a Scheme of Arrangement, which means it will be taken to the High Court under Sections 391 to 394 of the Companies Act, 1956 and will thus, enjoy exemption from the Takeover Code. To a large extent, the deal’s success will be predicated on its being piloted successfully through the myriad regulatory and structuring issues governing a deal of this nature.
Mr Vivek Gupta, who has worked in the M&A group of the tax practice at Ernst & Young for three years and Arthur Andersen for three and a half years, prior to joining BMR, has experience in mergers, acquisitions and business reorganisations, domestic as well as multi-jurisdictional, having participated in many cross-border and domestic transactions across diverse industries. He has advised a number of domestic and multinational companies on complex transactions which involve acquisitions, mergers, divestments and other business reorganisations and brings a blend of strategic, financial, tax, regulatory and commercial skills to such engagements. Mr Gupta, a Commerce graduate from the Delhi University and a Chartered Accountant, finds mention in the International Tax Review 2004, as a leading advisor on M&A transactions in India.