Bharti and MTN plan mobile superpower

The newly-proposed merger between India's leading mobile operator, Bharti Airtel, and MTN, the pan-Africa and Middle Eastern mobile group, would create a mobile powerhouse with network reach covering around one third of the world's population. The merged entity would count as one of the world's top three mobile groups alongside China Mobile and Vodafone Group. In conjunction with SingTel (currently a 30.4% stakeholder in Bharti) the new group would boast an unprecedented network footprint stretching across Africa, the Middle East, the sub-continent and Australasia.

The new merger talks come a year after the two parties called off earlier negotiations. Unlike last year – when control of the merged entity became a stumbling block – the two firms have already outlined specific details of how the merger will work. The latest proposals would see Bharti acquire a 49% shareholding in MTN, while MTN and its shareholders acquire an approximate 36% stake in Bharti, of which 25% would be held by MTN with the remainder held directly by its shareholders. SingTel is also understood to be taking an active role in the deal and it is estimated that the Singapore-based group will ultimately take a 20% shareholding in the enlarged group.

Bharti said that it would be the primary vehicle for the merged group to pursue further expansion in India and Asia, while MTN would be the primary vehicle for the group in Africa and the Middle East.

As our data for 1Q09 shows, the two groups are similar in terms of the size of their customer base (both are approaching 100 million connections), annual growth rates and quarterly net additions. However, MTN's spread across 21 markets (16 in Africa and five in the Middle East) gives it a significantly greater geographical footprint. Bharti has frequently been linked with expansion outside of its domestic market, but its move into neighboring Sri Lanka (included in Bharti's figures for the first time in 1Q09) is its only significant non-Indian market to date.

By contrast, MTN's market footprint includes a range of different market environments, from the mature, highly-penetrated South African market (one of the few where it has begun WCDMA rollout) to its fast-growing markets in West Africa (including MTN Nigeria, its largest market in terms of subscribers) and relatively untapped Middle Eastern markets such as Iran and Afghanistan.

MTN's West & Central Africa (WECA) region, which includes highly-populated countries such as Nigeria, Ghana, Ivory Coast and Cameroon, accounted for 47% of group revenue and 59% of group earnings (EBITDA) by year-end; its South & East Africa region accounted for 37% of revenues and 30% of earnings, while Middle East & North Africa (MENA) accounted for 17% of revenue and 11% of earnings.

Meanwhile, SingTel is set to be a key player in making the merger happen, including reportedly extending a multi-billion dollar credit line to help Bharti fund its side of the deal. Aside from its wholly-owned subsidiaries in Singapore (SingTel) and Australia (Optus), India represents SingTel's most significant market.

According to SingTel's figures, Bharti contributed SGD225 million ($155 million) in pre-tax ordinary profit in 1Q09, an 18% rise in Indian rupee terms and a 1.4% rise in Singapore dollar terms. This performance offset declines at many of SingTel's other regional affiliates, including Telkomsel (Indonesia), Globe (the Philippines) and AIS (Thailand), which were negatively affected by currency fluctuations. SingTel is deemed to be a keen supporter of the Bharti-MTN merger, as part of its wider strategy to expand its business into Africa and the Middle East.

While India's Bharti and South Africa's MTN appear to have ironed out many of the ownership issues that derailed their talks last year, the deal could still face political and regulatory problems. Both India and South Africa are keen to promote themselves as investor friendly, yet both have a mixed record with regards to foreign investment on this scale (a recent example was Vodafone’s recent acquisition of South Africa’s Vodacom, which was almost derailed by the country’s unions).

However, the benefits of creating what would be the world’s third-largest mobile operator by subscribers are potentially enormous in terms of economies of scale, marketing and branding, and the ability to target new markets. The merged entity would instantly be able to serve a third of the world’s population and its footprint would include some of the fastest-growing emerging mobile markets in the world, most notably Iran.

The two firms would also bring different skills to the partnership; Bharti has succeeded in a low-tariff market against multiple competitors, while MTN has managed to build-out many of its mobile networks from scratch. Meanwhile, SingTel, as a minor partner in the enlarged company, runs some of the world’s most advanced mobile networks in markets such as Singapore and Australia.

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