Emerging-market telecoms | Eyes on Africa | Economist.com
by Gilbert Keith
Eyes on Africa
India’s Bharti Airtel may buy South Africa’s MTN
IT WOULD be the biggest thing to pass between India and South Africa since Mahatma Gandhi moved from one country to the other. This week it emerged that Bharti Airtel, the largest mobile-phone operator in India, is holding “exploratory” talks to buy South Africa’s MTN, the biggest operator in Africa.
According to the Financial Times, Bharti has indicated it would be willing to pay about $19 billion for 51% of the company. That would make it the heftiest overseas acquisition ever made by an Indian firm, more than Tata Steel paid for Corus, a British steelmaker, and seven times the amount India invested in the whole of Africa over the ten years to 2004.
The deal would unite the leading companies in the world’s two most promising mobile markets. In neither market have penetration rates yet exceeded a third of the population. India is adding more subscribers per month than any other country. In Africa, subscriptions are projected to grow by 11% a year until 2011, according to Gartner, a research firm.
For now, though, the subjunctive mood is the right one. Both sides to the deal were keen to stress the early and exploratory nature of the talks, talks they had previously denied having. Bharti has arranged only $12 billion of the money it would need; raising the rest would strain its balance sheet or dilute its equity. And Bharti is not the only potential suitor eyeing MTN, which has not yet given the Indian company exclusive rights to look through its books. The South African company’s shareholders may therefore flutter their eyelids and sit on their hands, waiting for better offers from elsewhere.
If anything, Bharti would be marrying up. MTN boasts more subscribers (68m to Bharti’s 62m), a broader geographic reach (it has subscribers in 21 countries, including 9m in Iran and over 3m in Syria), stronger revenues ($10.7 billion compared with Bharti’s $6.8 billion) and higher profits ($4.7 billion to and $2.8 billion for Bharti). Bharti’s market-capitalisation is bigger than MTN’s. But that gap narrowed after Bharti’s share price fell and MTN’s rose in response to news of the bid.
These numbers do not daunt Bharti, which has the confidence and clout of a company that has taken full part in an economic miracle. India added over 10m mobile-phone subscribers in March alone, taking it past America, by some estimates, to become the second-biggest mobile market in the world. Bharti itself signed up 6.8m subscribers in the first three months of this year. It has maintained profit margins (before interest and taxes) of over 40% even as it has offered calls for as little as one rupee per minute.
It believes it has learned some tricks of the trade that would work similar wonders in Africa. Penetration rates are similar in many African countries, and revenue per user equally low. To succeed a company has to expand its subscriber base cheaply and quickly, making money on small upfront payments of a few minutes at a time. This is Bharti’s speciality. “They know which tricks work,” says Madhudusan Gupta of Gartner, a research firm, “and they are very strong with their marketing gimmicks.”
Flush with this domestic success, Bharti has for years been harbouring international ambitions—ambitions that extend far beyond its modest ventures in the Seychelles, Guernsey and Jersey. It is one of a new breed of Indian firms that are “graduating to globalisation” to quote the title of a recent paper on the phenomenon. As the country has opened its domestic markets, a few of its companies, steeled by competition at home, have become productive enough to compete abroad. Outbound FDI from India has increased from negligible amounts a few years ago to almost $4 billion in the last quarter of 2007.
Buying MTN would allow Bharti to meet its international ambitions in full measure. But an outright takeover might prove too expensive. Perhaps its exploratory talks will therefore explore other, cheaper options: a merger, for example, or a joint-venture. That might still allow the two companies to aim for what financial analysts call “synergies”. Or as Gandhi put it, “interdependence is and ought to be as much the ideal of man as self-sufficiency.”