"There might be some earnings pressure on Airtel in the short term as it will take time to bear fruits of this merger. Post M&A jitters would affect scrip movement in near term," said Jagannadham Thunuguntla, equity head at SMC Capitals.

1. Bharti-MTN deal: Analysts divided over need for merger
By Staff Reporter
23 August 2009 @ 8:39 pm IST
Mumbai - India's biggest mobile operator Bharti Airtel (Bharti) and South African telecom major MTN
Group announced last week that they have extended the deadline for exclusive merger talks till
September 30, indicating that the two parties are close to clinching the deal, which is being billed as
India's biggest-cross border deal, eclipsing Tata Steel's acquisition of Anglo-Dutch steel major Corus
for $12.2 billion in 2006 and would create an emerging markets giant with 200 million mobile
subscribers in more than 20 countries across India, Africa and the Middle East.
The deadline extension has, however, created concerns among investors in India and market
watchers claimed that the deal structure is too complex to succeed.
As per the terms of the deal, Bharti would accumulate a 49 percent stake in MTN, buying a stake
directly for cash and newly issued global depository receipts (GDR), plus receiving MTN shares as
part of the swap.
On the other hand, MTN would buy a 25 percent stake in Bharti for $2.9 billion in cash plus new
shares, while stock received by its shareholders would take its stake in Bharti to about 36 percent.
"Complexity seems to be one of the key culprits for the further extension," Morgan Stanley analysts
wrote in a report on Thursday after the firms said they were extending talks.
"Our concern though is the longer the wait the more of a potential sweetener may be required as
attention switches to 2010 earnings rather than 2009," they said.
"It simply means the uncertainty continues," said Sanjay Chawla, telecoms analyst at Mumbai
brokerage Anand Rathi. "There could be issues on pricing, management representation or Bharti
GDRs not wanted by MTN shareholders."
According to UBS analysts Suresh Mahadevan and Nupur Agarwal, MTN shareholders do not seem
to favor the deal under current terms and since Bharti is unlikely to pay significantly more, "we
believe there is a good chance that this transaction may not happen."
In India the deal could also face regulatory issues. According to sources close to the development,
the deal is already facing resistance from some shareholders of Bharti, who have been telling the

2. Securities and Exchange Board of India (Sebi) that MTN legally needs to make an open offer to
shareholders.
The Securities Appellate Tribunal (SAT) will also be hearing on August 28 an appeal made by a
shareholder seeking clarity on a SEBI order, which exempts MTN from making such an open offer if
a merger deal materializes, provided it does not convert its GDRs into equity.
However, banking sources said MTN has no intention of converting its GDRs into equity. They also
said Indian laws do not allow a company to go for dual listing or even secondary listing on the stock
exchange of another country. This could be an issue, since the two companies are looking at a
merger, though not in the first phase.
It was also not immediately clear how the deal would test India's foreign ownership rules in telecom
that cap overseas equity at 74 percent. Such ownership in Bharti Airtel, if it includes the foreign
equity in its holding companies, is already some 67 percent. But, if the rule is interpreted as the
foreign stake only in Bharti Airtel, the company has some headroom for equity change.
Analysts also said the merger deal would dilute Bharti's earnings in the first year after which its
earnings-per-share would pick up.
"There might be some earnings pressure on Airtel in the short term as it will take time to bear fruits
of this merger. Post M&A jitters would affect scrip movement in near term," said Jagannadham
Thunuguntla, equity head at SMC Capitals.
In South Africa, analysts shared the same concerns as there too, the deal may face regulatory
hurdles. The affirmative action policy in South Africa, to which Bharti has to abide by, requires
companies to vest at least 25 percent of their equity and 40 to 50 percent of their management
control to people of African origin.
The deal also needs the nod pf South Africa's powerful trade union COSATU, which has clout with
new President Jacob Zuma and almost derailed Vodafone's takeover of MTN rival Vodacom in April.
COSATU said there were "worrying aspects" of the deal and it was looking at it closely.
"We do think it's unacceptable that it's been going on for so long. If it's such a complicated deal, why
do they even go for it?" said Zwelakhe Mnguni, portfolio manager at South Africa's Stanlib Asset
Management, which own shares in MTN.

3. Agrees Mark Ansley, a telecoms analyst at Cape Town-based Cadiz African Harvest, which also
owns MTN shares. "I find it puzzling. They have been in discussions for quite a while now. It's not
great to keep the stock in limbo like this," Ansley said.
"We have seen it in the past that ratings turn to drift while stocks are kept in limbo in terms of
corporate action. It's certainly not good news," he added.
"The level of irritation rises as this drags on," said Anthony Sedgwick, investment manager at Polaris
Capital in Cape Town, which has an about 1.5 percent stake in MTN. "There has been no
communication regarding the rationale... why this deal apparently has to be pursued at all costs."
Sedgwick said that based on the information disclosed to date by the companies, the fund manager
would vote against a transaction.
"The sooner we hear more detail on the rationale the better," said Gavin Joubert, fund manager at
Coronation Fund Managers in Cape Town, which holds a roughly 5 percent stake in MTN on behalf
of clients. "Our reasons for being opposed remain unchanged."
Joubert said the price being offered is a significant issue, although Coronation also is concerned
about the form payment is expected to take. Exchange controls in South Africa restrict the
investment that institutions can make in foreign stock, so to hold on to Bharti Airtel global depositary
receipts could mean selling other global equities.
He said there also are doubts merger synergies would be significant between a company focused on
India and another with operations in 21 African and Middle Eastern countries. "Under the terms
disclosed Bharti would be the proxy for Asian expansion. But as things stand today, MTN is free to
expand into Asia," Joubert said.
Like Coronation, at least four of MTN's top 25 shareholders are expected to reject Bharti's offer. The
deal, to succeed, needs the approval of shareholders who own at least 75 percent of MTN stock.
However, some analysts are more hopeful.
According to Mohd. Saif, deputy director, (consulting - ICT Practice), Frost & Sullivan, achieving
critical scale would be the greatest advantage for both Bharti and MTN if the deal were to go
through.
"We are talking about creating a telecom entity which would be the third largest in the world. With
this deal, the new entity will cover almost 24 countries, most of them categorized under high-growth

4. geographies. Since there is a synergy between the strategic intent of Bharti and MTN, hence they
will complement each other in achieving the necessary mandate and will be able to compete with the
big boys of telecom world globally," Saif said.
Agree Gajendra Nagpal, CEO, Unicon Financial Intermediaries. "These kind of deals take time to
bear fruit. Look at the size of the company they will be creating. If you look at it from a long-term
perspective, it is a step in the right direction," Nagpal said.
According to Mohit Rana, senior principal at consultant AT Kearney &Co, the deal, if it concludes
successfully, assures Bharti Airtel of "continuing growth over the next few years and offers a nice
buffer against competition, rural markets and MVNOs (mobile virtual network operators) and it opens
new vistas for Bharti and future organic and inorganic growth opportunities."
Bharti could also bring in cost efficiencies into MTN's operations to boost consolidated profits, Rana
said.
Romal Shetty, a director at audit and consultancy firm KPMG International's India offices, agrees. "I
am optimistic that the deal will go through. It's very clear both for MTN and Bharti where are their
next markets. For Bharti it is Africa and for MTN, it is the (Indian) subcontinent. Both Africa and India
hold 33 percent of the world's population and both these markets have around 40 percent
penetration allowing for a lot of opportunity," Shetty said, adding, "There are also the synergies that
can be leveraged by both firms in terms of costs as well as the outsourcing that Bharti is well known
for."
According to Kevin Trindade, senior analyst with Mumbai-based KR Choksey Shares and Securities
Pvt. Ltd, the fact that the two firms are still in discussions show that they are still serious. "Probably
some more approvals are needed. The integration of MTN's subsidiary firms and the approvals for
them have to also be sorted out. There are chances that the contours of the deal have changed and
so they (may) have restarted negotiations based on these contours now," Trindade said.
"MTN is keen on this," Ferdi Heyneke, an equity trader at Johannesburg-based Afrifocus Securities
Ltd. "It's important to expand in countries where there's a lot of growth. It's a good deal for MTN."
"I think that the extensions actually mean that the deal is more likely to happen," said Angel
Dobardziev at London-based telecoms consultancy Ovum. "I think all the parties are keen to take all
the time they need to ensure that this happens this time."

5. For Bharti, analysts said the reasons are more compelling as the Indian firm, which started wireless
services in Sri Lanka this year, is aiming to increase overseas sales as competition intensifies back
home with the entry of more foreign rivals, including Japan's NTT DoCoMo Inc. and Norway's
Telenor ASA.
Bharti's nearest Indian rival, Reliance Communications, which is the leader in CDMA-based network,
also started a second nationwide wireless network (GSM) in January, helping it narrow the gap with
Bharti.
The deal would also increase the average revenue per user (ARPU) of the Indian firm, analysts said,
as Africa and large parts of West Asia have high customer billings in the industry - the ARPU in
African countries (as a whole) and other emerging geographies is around $9-11 and runs up to $18
a month in countries such as Syria and South Africa - presenting a revenue expansion opportunity
for Bharti, which like most Indian players rarely has ARPU rates of not more than $5.
According to Bundeep Singh Rangar, chariman, IndusView Advisors, the deal has its advantages as
the move counters any threat from Western and emerging market telecom companies, and will help
exploit subscriber base in Africa and India. "For Bharti, the deal will mean cost sharing, lower
roaming tariffs, and better purchasing power. It will help increase subscribers and ARPU in the long-
term," he said.
"For Bharti Airtel, this is really the next wave of growth and being leaders in the market and business
model innovation, they are already thinking four-five years ahead," said Arvind Subramaniam,
Partner at Boston Consulting Group (BCG).
According to Subramaniam, there are "early indications of India plateauing out with this move" and
"for that wave of growth, certainly Africa and Middle East make a lot of sense in that regard."
"There's still growth in the emerging markets," said Nishna Biyani, an analyst at Prabhudas Lilladher.
"With MTN, they'll get access to growth in the last frontiers of the telecoms industry, Middle East and
Africa."
Agrees Madhusudan Gupta, a Singapore-based senior research analyst at Gartner Inc. "Asia Pacific
and Africa are probably two of the last under-penetrated markets," Gupta said, adding that India will
have more than 700 million mobile-phone users in 2013, rising from about 400 million now.
Analysts have also brushed aside concerns that FDI restrictions in India could pose a problem.

6. Earlier, there was a ceiling of 74 percent FDI in telecom and with 40 percent FDI already existing in
Bharti, a merger would have meant breaching the 74 percent mark. However, the new FDI policy
allows foreign equity of up to 99 percent through the indirect route. As a result, a 36 percent
"economic interest" (or the sum of direct and indirect equity holding in a company) in MTN's favor
can be easily accommodated, analysts said.
Standard Chartered is advising Bharti Airtel, while Bank of America Merrill Lynch and Deutsche
Bank are advising MTN.
Shares of Bharti Airtel, which us valued at $35 billion, rose 2.86 percent to Rs.411.50 at the Bombay
Stock Exchange (BSE) on Friday.