"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," SMC Capitals Equity Head Jagannadham Thunuguntla said.

1. Bharti Airtel, MTN resume merger talks, to form
world's third largest mobile operator
By Staff Reporter
26 May 2009 @ 07:55 pm IST
Mumbai - India's largest mobile operator Bharti Airtel and South African mobile phone group MTN
resumed merger talks on Monday, saying they are exploring a potential deal, which could lead to the
formation of a leading emerging markets telecoms group with network spanning across Africa,
Middle East and Asia. A year back, the Bharti talks collapsed when the South African firm proposed
a new structure that would have seen Bharti become an MTN unit.
As per the latest complex deal, in which both firms pay cash and stock for stakes in each other,
Airtel could buy 49 percent of MTN while the South African firm and its shareholders will pick up 25
percent and 11 percent stake respectively in the Indian company.
Under the initial proposed deal, MTN will pay $2.9 billion and shares equivalent to 25 percent of its
share capital to Bharti Airtel in return for 36 percent in the Indian firm. The New Delhi- headquartered
firm, in turn, will buy 36 percent of MTN, controlled by the Lebanon-based Mikati family and a trust
representing senior management and employees, by offering 86 rand (or $10.44) and 0.5 Bharti
Airtel share for each MTN share so acquired through a global depository receipt (GDR) listed in
Johannesburg Stock Exchange where MTN is also listed. Together with the earlier 25 percent
crossholding in MTN, Bharti Airtel will then own 49 percent of MTN's enlarged capital.
Both MTN's Mikati family and Bharti's promoter Mittal family, as also the senior MTN management
led by CEO Phuthuma Nhleko, will not buy or sell shares in the deal.
Sources close to the development said both Bharti and MTN are happy with the terms of the deal as
while the net outgo for Bharti Airtel in the deal is around $3.9 billion (it spends $6.8 billion but also
receives $2.9 billion), MTN has a market capitalization of around $30 billion, so raising $2.9 billion is
not considered a problem.
The deal, Bharti said in a statement, would give it quot;substantial participatory and governance rights in
MTN, enabling it to fully consolidate the accounts of MTNquot; while MTN would also have
representation on the Bharti board.

2. While MTN would be the primary vehicle for both Bharti and MTN to pursue further expansion across
Africa and the Middle East, Bharti would be the primary vehicle for both Bharti and MTN to pursue
further expansion in India and Asia.
Standard Chartered is advising Bharti while Bank of America Merrill Lynch and Deutsche Bank are
advising MTN.
The two companies said the potential value of the deal, which has resumed a year after previous
talks broke down over who would control a combined entity, was in excess of $23 billion and if
successful, the merger would not only be the world's biggest non-pharmaceutical M&A in 2009 but
also it would create one of the world's top three mobile firms by users with 200 million mobile
subscribers in more than 20 countries. The merger will be India's biggest-cross border deal,
eclipsing Tata Steel' acquisition of Anglo-Dutch steel major Corus for $12.2 billion in 2006.
In terms of subscribers, currently the top five mobile firms, as in March, are China Mobile (477
million), Vodafone (303 million), Telefonica SA (198 million), America Movil (187 million) and Telenor
(166 million).
While in terms of market capitalization too, the new entity, post-merger, would be a behemoth in the
telecoms industry with $61.4 billion, the annual sales of the combined entity is expected to be over
$20 billion with Bharti and MTN reporting $7.8 billion and $12.3 billion respectively in annual sales in
the last financial year.
Founded in 1994, MTN operates in 21 countries in Africa and the Middle East. The bulk of its
subscribers are in South Africa, Nigeria, Iran, Ghana, Syria, Cameroon, and Uganda. It is Africa's
largest mobile phone operator by subscribers.
While MTN said on its website in April that it reached 100 million subscribers, Bharti said on May 15
that its total subscriber base had crossed 100 million, doubling since October 2007. Bharti, which
began mobile services in 1995 after India opened up the sector to private entities, also said it hopes
to double customers to 200 million within three years.
A successful merger with MTN would help Bharti achieve its goal sooner than it expected.
quot;The broader strategic objective would be to achieve a full merger of MTN and Bharti as soon as it is
practicable, to create a leading emerging market telecom operator,quot; a Bharti statement said.

3. Bharti also added that the potential transaction, when completed, would be expected to create value
for its shareholders synergistic benefits and enable it to further diversify into the fast growing and
relatively under-penetrated African and Middle Eastern markets.
quot;This potential transaction would combine the strengths of two leading emerging market telecom
operators to create a leading telecom group serving the large populations of Asia, Middle East and
Africa. The potential transaction will represent a significant development in South-South cooperation
between India and South Africa. Additionally, along with Bharti's partner, Singapore
Telecommunications, and its Bridge Alliance the combined networks will cover a geography
spanning Africa to Australasia,quot; the company added in a statement.
quot;We are delighted at the prospect of developing a partnership with MTN to create a telecom
powerhouse in emerging market. Both would stand to gain from sharing each other's practices in
addition to savings from enhanced scale. We see real power in the combination and we will work
hard to unleash it for all our shareholders. This opportunity also represents a first of its kind in
developing an Indian-African initiative that would serve as a shining example of South-South
cooperation,quot; said Sunil Mittal, chairman and managing director, Bharti Airtel.
Bharti also said the deal could change Singapore Telecommunications or Singtel's holding in the
Indian firm.
Currently, SingTel, Southeast Asia's top phone firm, owns about 31 percent in Bharti Airtel but post
the potential transaction, SingTel's stake quot;would be contingent upon the ultimate mix of cash and
shares,quot; Bharti said in a statement, adding that SingTel would remain a strategic partner and
significant shareholder after any deal.
Last year when Bharti and MTN were first in talks, SingTel had said it would support Bharti
financially in any merger and acquisition activity.
Currently, the Singaporean telecom firm is being advised by Goldman Sachs on its plan regarding
the deal.
quot;The potential transaction between Bharti and MTN would create a leading telecommunication
service provider group aligning Bharti's market leading Indian business with MTN's market leading
African and Middle Eastern operations. The potential transaction would also represent a significant
development in South-South cooperation between India and South Africa,quot; MTN said in a statement.

4. quot;The rationale for this potential transaction between MTN and Bharti was highly compelling. It
addresses our strategic imperative of becoming one of the pre-eminent emerging market
telecommunications companies with leading positions in three of the fastest growing wireless
markets globally, India, Africa and the Middle East, with no overlapping footprint,quot; said MTN's
Nhleko.
quot;We are excited at the prospect of teaming up with Bharti, India's number one wireless operator and
one of the most strongly capitalized players amongst its emerging market peer group. This would
create a highly visible commercial partnership between South Africa and India,quot; Nhelko added.
However, both the telecom majors warned that quot;the discussions are at an early stage and may or
may not lead to any transaction.quot;
quot;The structure and terms of the potential transaction may be adjusted to reflect further discussions
between the parties and discussions with lending banks and applicable regulators. No decisions or
agreement to acquire any shares or implement the transactions outlined above have been made by
the Boards of either MTN or Bharti,quot; they added in a joint statement.
The two firms have set an exclusivity deadline of July 31.
According to market analysts, though the deal is beneficial to both the firms, yet, the complexity of it
could make either or both the firms back off at the last moment.
quot;There is a long road to travel for the deal to actually go through,quot; said Jan Meintjes, a telecoms
analyst at Gryphon Asset Management. quot;I think there are serious issues in terms of the spheres of
influence of the two companies and their management.quot;
quot;Trying to combine an Indian operator with an operator with 21 countries isn't going to be easy,quot;
Theo Maas, who helps manage $3.5 billion at Fortis Investment Partners in Sydney, said by
telephone. quot;That was my worry last year and it's still my worry now.quot;
A full merger would need government and regulatory approval. 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 this month, said there were quot;worrying aspectsquot; of the deal and it was looking
at it closely.
Other hurdles include the affirmative action policy in South Africa, which 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.

5. 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.
quot;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,quot; said Jagannadham
Thunuguntla, equity head at SMC Capitals.
Agree Gajendra Nagpal, CEO, Unicon Financial Intermediaries. quot;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,quot; Nagpal said.
However, the analysts said the deal had its synergies as trading equity stakes would give both firms
exposure to new markets ripe for growth, while a full merger would yield cost savings, allow for
technology sharing, and provide the financial muscle for more expansion.
Just over a third of India's 1.1 billion population have a cell phone, while MTN operates in virtually
untapped markets such as Afghanistan and Sudan, as well as in Africa, where some analysts
believe users could almost double to 700 million by 2013.
For Mohd. Saif, deputy director, (consulting - ICT Practice), Frost & Sullivan, achieving critical scale
would be the greatest advantage for both Bharti Airtel and MTN if the deal were to go through.
quot;We are talking about creating a telecom entity which would be the third largest in the world.
Moreover, it would have a footprint across 24 countries and hence be able to compete with the big
boys of telecom world globally,quot; Saif said.
quot;There are some tangible benefits for both: bigger market exposure, access to innovative products
and better buying power,quot; said Khulekani Dlamini, a fund manager at Cape Town's Afena Capital.
According to Mohit Rana, senior principal at consultant AT Kearney &Co, the deal, if it concludes
successfully, assures Bharti Airtel of quot;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.quot;

6. Bharti could also bring in cost efficiencies into MTN's operations to boost consolidated profits, Rana
said.
Agrees Romal Shetty, a director at audit and consultancy firm KPMG International's India offices.
quot;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,quot; Shetty said.
quot;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,quot; Shetty added.
quot;MTN is keen on this,quot; Ferdi Heyneke, an equity trader at Johannesburg-based Afrifocus Securities
Ltd. quot;It's important to expand in countries where there's a lot of growth. It's a good deal for MTN.quot;
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. quot;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,quot; he said.
quot;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,quot; said Arvind Subramaniam,
Partner at Boston Consulting Group (BCG).

7. According to Subramaniam, there are quot;early indications of India plateauing out with this movequot; and
quot;for that wave of growth, certainly Africa and Middle East make a lot of sense in that regard.quot;
quot;There's still growth in the emerging markets,quot; said Nishna Biyani, an analyst at Prabhudas Lilladher.
quot;With MTN, they'll get access to growth in the last frontiers of the telecoms industry, Middle East and
Africa.quot;
Agrees Madhusudan Gupta, a Singapore-based senior research analyst at Gartner Inc. quot;Asia Pacific
and Africa are probably two of the last under-penetrated markets,quot; Gupta said, adding that India will
have more than 700 million mobile-phone users in 2013, rising from about 400 million now.
According to Sanjay Chawla, a telecom analyst at Anand Rathi Securities, based on Friday's closing
share price, the deal gave Bharti an enterprise value of 11 times EBITDA, while MTN was valued at
5.5 times, making it a good deal for Bharti.
Analysts have also brushed aside concerns that FDI restrictions in India could pose a problem.
Earlier, there was a ceiling of 74 percent FDI in telecom and with 40 percent FDI already existing in
Airtel, 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
quot;economic interestquot; (or the sum of direct and indirect equity holding in a company) in MTN's favor
can be easily accommodated, analysts said.
Meanwhile, according to sources close to the deal, if the merger talks succeed, Bharti may raise
about $3 billion to $4 billion in debt, as it does not plan a rights issue of shares to fund the deal.
Analysts agree. Debt would be the best option for Bharti, analysts said, as the firm has started
seeing positive cash flows and dividends from MTN would help it service the debt.
Bharti had $629 million in net debt at the end of March, representing a net debt to EBITDA of 0.25,
making it easier for the firm to take on more debt.
Meanwhile, shares of Bharti Airtel closed down 5.41 percent at Rs.811.40 at the Bombay Stock
Exchange on Monday. Analysts said it was not surprising as the deal is very complex and it may not
be so easy for a layman investor to understand the stock properly.
Besides most investors were concerned about the deal's impact on Bharti's balance sheet in the
near future, which already looks strained due to the expenses the Indian firm has to incur for 3G

8. (third-generation) spectrum and for rolling out new services in addition to its normal capex, which
could be as high as $9 billion this year alone.
Moreover, the unlikelihood of an open offer (since there is no change in management control) and
continuing uncertainty over a possible counter offer also weighed on investors' minds.