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Bharti-MTN will exceed Vodafone’s emerging market presence

Posted by fairval on May 22, 2008


As with most large M&A deals attempted with Indian companies, the general reaction from the broking community to the Bharti-MTN deal has been muted. At one extreme is a Kotak report which says there is little synergy or strategic benefit. Kotak has a ‘reduce’ rating on Bharti. An Edelweiss report talks of likely savings through bulk sourcing of equipment/handsets for the combined entity. While the report concedes that ‘the deal could improve MTN’s operational efficiency via possible emulation of Bharti’s lower cost structure’ it goes on to say that there may not be any other significant operational synergies initially from the deal.

A Merrill report is a little more positive. Avoiding standard management graduate-lingo of ‘synergy’ or ‘strategy’, in a rather workman like fashion, it points to a ‘strong fitment with Bharti (for MTN) if deal materializes’. By ‘fitment’ it probably alludes to the fact that Bharti is largely in one country – India – and while MTN is in 21 countries, there is no overlap. Both companies have low leverage with net debt/EBITDA, says the Merrill report. Forecast strong growth for both companiess should facilitate quick easing of any near-term stress on valuations, says the report.

A report by Enam avoids views altogether, and sticks to facts. MTN has its own captive network – the report informs. ‘Bharti could pioneer its outsourcing model for MTN as well. This would involve acquisition of management control & it may take a few quarters for the benefits from this to accrue’.

While most broker reports don’t quite see any strategic (or operational) benefit, whenever a company goes for an acquisition of this size – or of any size for that matter – the management must have seen some benefit. This deal seems to be mainly about acquiring customers, and as one report says ‘geographical diversification’. MTN is not a technology supplier, and in any case, Bharti’s business model believes in outsourcing technology. Sunil Mittal seems to see Bharti mainly as a brand. The way Sunil Mittal has evolved Bharti, it is now largely a customer acquisition and servicing company. Other than the customer, almost everything else is non-core for Bharti. And while implementing this over the years, Bharti has managed to create an extremely cost efficient operation.

An idea of how cost efficient Bharti is can be seen from comparing with MTN. While both MTN and Bharti have similar EBIDTA margin of around 45%, Bharti’s revenue per customer – ARPU in telecom parlance – is only $9, about 45% lower than MTN’s ARPU of $16. MTN spends $9 per month per customer in core operational costs, while Bharti spends only $5. While Bharti may not be able to knock off the entire $4 difference, but there seems to be scope for taking costs out. Even if Bharti takes out $1 per customer from MTN’s cost structure, that is almost $1bn of cost savings per annum.
However, this deal is not about restructuring MTN’s cost structure. It is more about its customer base. Perhaps Bharti feels it could reduce prices and increase market penetration in countries where MTN operations. Another way to get some sense of the merger is to compare the combined entity with Vodafone. The company entity will exceed Vodafone’s presence in emerging markets. Vodafone had around 112 million customers in its emerging europe, and asia-pacific region spread over 11 countries. This is its fastest growing region, growing at around 18-20% organically.

In recent years, Vodafone has tried to diversify away from its European base, since there it gets barely 10% annual growth in customer base. In 2007, Vodafone’s total customer base grew 38%, large part of which came from its acquisition of Hutch’s operations in India. If you remove Hutch from Vodafone’s number, the rest of it grew only 13% in customer numbers. On the other hand, Bharti grew 73% and MTN grew 53% last year, mostly organically. The Bharti-MTN combine will have a 130 million customer base which grew 60% last year, a terrific rate compared the more pedestrian growth of Vodafone.

The world’s largest emerging market company remains China Mobile, which has over 400 million customers, though only in one country.

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