The move to buy into MTN is a good one even if the benefits take their time coming
If the Street seems disappointed with Bharti Airtel’s second attempt to team up with African telecom major MTN—the stock lost nearly 6 per cent on Monday—it’s probably because the benefits will not be seen in a hurry. Also, MTN has been valued roughly at a forward price-earnings multiple of around 20 times and that pretty much factors in the near term upsides. Moreover, Bharti’s earnings will be diluted by about 5 per cent in the first year and the net outflow of cash of around $4 billion (close to Rs 20,000 crore) will weigh on investors’ minds especially with the 3G auctions around the corner.
Of course Bharti is expected to generate operating cash flows of just under Rs 35,000 crore in 2009-10 and 2010-11. But, since the stock was already trading at a not-so-cheap 17 times before the deal was announced, it’s not surprising that it’s lost some ground. Also, there’s some amount of circumspection because the play now changes from being an India-centric one to one that also involves the African market.
That’s not such a bad thing because Africa is a large hunting ground, hugely underpenetrated and the risks are minimised because much like in India, it’s pre-paid connections that form the chunk of the market. Despite that, the average revenue per user (arpu) are reasonably high resulting in reasonably strong operating margins of around 40 per cent.
However, MTN is believed to be less cost efficient than Bharti, so the Indian firm can give it a tip or two on managing expenses. Also, the Indian market is becoming a bit of a jungle with a host of new entrants and while Bharti may continue to have the lion’s share, in terms of revenues, profitability will be under pressure. So, it’s not a bad idea to de-risk the business model by foraying into a market that holds tremendous potential given the size of its population.
Till such time as there is consolidation in the home market, Bharti can focus on the alliance—and consequent merger—which will come with the usual synergies. The biggest saving should come from the two shopping together for equipment—industry watchers say they could save anywhere between 10-15 per cent.
