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South Africa: Bharti's Potential Bid for Mtn 'Too Low'
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Business Day (Johannesburg)
7 May 2008
Posted to the web 7 May 2008
Lesley Stones
Johannesburg
INDIA's leading cellular operator, Bharti Airtel, must add at least 20% to its potential bid for MTN to even begin to attract shareholder interest, analysts and investors believe.
An expected bid of R165 a share for a 51% stake grossly undervalues MTN, analysts say, although the $20,7bn offer may already prove a stretch for the suitor. "If somebody offers me R165 I'll tell them to get lost," said Irnest Kaplan, MD of Kaplan Equity Analysts. "I want my MTN shares, I don't want R165 because in two or three years its going to be worth much more than that -- maybe R300."
Any large institutional investor that took the cash would struggle to find another investment with as much potential upside, he said.
"You would be hard pressed to find something that will give you the same returns, because MTN stands head and shoulders above everybody else."
So far no official bid has been announced, with talks between the two operators described as "exploratory". But the Financial Times said insiders had mentioned R165 and said Bharti had secured bank loans of $12bn towards the deal. It would fund the balance by issuing shares.
Kaplan said local investors would not be enticed by Bharti shares. It may be a good company, but it was unknown in SA and investors would rather stick to the tried and tested cash machine of MTN.
Bharti's own investors are equally ill at ease. Its shares have shed 5% amid concern about how it could afford the deal, with Indian analysts saying the weakness was fuelled by fears of a bidding war.
Metropolitan Asset Managers telecoms analyst Sisa Rafuza said Bharti's offer would need to top R200 a share to interest his company, which holds a sizeable stake in MTN.
MTN shares touched a fresh high of R165 yesterday by gaining R15, so the potential bid is only equal to market value. The bid evaluated MTN only on its latest results and failed to take into account the huge profit potential for its networks in Iran and Nigeria, said Rafuza.
"They would be giving it away," he said. "Iran is a greenfield operation with huge growth and in Nigeria they are the market leader with significant scope for growth because the penetration is still low."
The Financial Times said MTN's board was holding out for an offer nearer R180, but that was still well short of investors' expectations. Ivy Asset Management fund manager Bruce Main said Bharti would have to pay a hefty premium and offer at least R211 to be attractive.
Ironically, MTN is bigger by revenue, customer numbers and geographic spread, although their net profits are roughly even. But the debt profile MTN created through its own $5,5bn takeover of the Middle East operator Investcom leaves it with too little cash to be the acquisitor in this courtship.
Its revenue last year touched R73bn with net profit of R11,9bn. In the last quarter its users surged 11% to exceed 68-million in 21 countries, while its market capitalisation is nudging $40bn.
Bharti has a market capitalisation of about $42bn. Its annual revenue is equal to about R49bn, with a net profit of R12bn, generated from 62-million cellular subscribers.
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What would make a deal with India's largest operator appealing is that both are experienced in tackling vast countries with little basic infrastructure and low-income customers.
Bharti Airtel chairman Sunil Mittal has promised a bigger push into poorer, rural areas this year. Since MTN has already entered and made profits in numerous poor countries, the two could gain much by pooling their experience.
Both are operating in countries with extremely low cellular penetration levels, creating natural growth potential as their infrastructure grows.
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