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The Season of Mergers

May 8, 2008

These are the season’s of mergers. Talk,more talk,some more talk and pissed off “screw-yourself-talks”. And then there is the idle chit-chat in socialite dinners and charity functions.

CEO A : Hey,B, we have beaten you this year too guys.

CEO B: No chance! we acquired worthless startups with over $6billion of booty.

CEO A:Hehe.. you are mistaken boy, we acquired hopeless and worthless startups twice more than what you did this year. But yeah, backdoor talks though.

CEO B: Huh? Don’t worry A, we will beat at it the next year. By the way, you remember the fuzzylator vrruum- vruum maker which had sales of just $100 from the Museum of Geneva? We acquired that. Tell me, if you could beat that stupidity.

CEO C: Hey Guys, whats the banter about. Heard something about the fuzzylator?

CEO A & B: Yeah!

CEO C : Some hot acquisition, you guys have made…

CEO C: Guys, you fellas have gone real gung-ho on this acquisition game man, great! I have to catch up with you guys this year. Already my in-laws and missus is asking me to do some shopping, else it is becoming difficult for me to make some news. My wife loves talking about those, you know!

[almost sympathetically the other two nod and all three let out a collective sigh]

So here I was evesdropping on the business newsmakers of the world, talking about their fears and apprehensions. Strange world isn’t it?

Lets talk about Mittal. Not the Arcelor one, but the home grown one. Sunil Bharti Mittal.The Airtel one.

Mittal last year, was the Chairman of CCI[Confed of Commerce and Industries or something to that effect]. That means, committees, more meetings, more talks, reports oh yes power point presentations, and endless rounds of talks. And being the hands-on man he is, he surely would have hated his job. No doubt. And while, Tatas of the world acquired Coruses, and Jaguars of the world, ahem ahem, lets say that our hero was sort of encaged into a position where he was being paid to attend meetings.

So this year he is out with a vengeance. Out to acquire almost similar sized, MTN Telecoms of South Africa for a hefty bid of $21/share [around 160 rand/share] as per Financial Times.MTN Telecoms on the back of this rose to a record share level, around 10 rand jump. MTN no doubt is one of the keyplayers in a region where not much of competition is there.It has presently around 68 million subscribers in Africa, Iran and Syria alone.

68 million??? Oh yes, 68 million.

Mittal had last year around 20 million in his pocket. And it is projected MTN will register around 400% growth by 2012 in this number. Talk about numbers in the range of 240million subscribers 😉 . But life is many a times a zero-sum game. Airtel’s stocks and MTN’s followed quite closely something like that. While MTN rose by 10 rands( around $1.3) Airtel fell by around 5.3%, INR 47.6 on the stock markets today in India. By the going exchange rate, the fall is around $1.19. Well what a correlation!!

As per I see it,India is a huge telecom market. Rural telephony is yet to set in, and urban market is growing at a huge pace, but far from totally tapped. South East Asia can also see quite a lot of activity, but given the presence of other competitors, it is indeed difficult to predict, what share Mittal can look out there. In my opinion, the next wave of telecom revolution is going to take place in South America,Balkans, Africa. Not necessarily on that chronological or market order.

South America is a huge huge potential market and if, Airtel can leverage MTN to enter South America,and manages to go by it, then RComs and Tatas and Ideas and Spices of India can well pack their baggage.
South America is the place I believe the fortunes will change.

Africa, though provides a huge untapped market, but I am a bit apprehensive about how the technology issue will play out. Although, this is an uninformed opinion, yet my main issue, is that if Africa has to be tapped then, the technology has to reach the people in the deepest villages, but given that GSM signal falters in the presence of foliage and humidity can prove to be a dampener, but again that is an opinion, and not a fact.

Now, coming to the issue of funding, Airtel has a big thing to worry about actually. Possibly equity dilution will take place. And with Singapore Telecoms holding quite a lot in Airtel, maybe just maybe, some ‘assurances’ can be extended. That is already visible now, as Goldman Sachs handles the finance of SingTel and Goldman is already busy with this merger and its nitty gritties. Quite a handful I must say. Airtel as such has a favourable equity-to-debt ratio [long term or total] around 2 point something [2.32 and 2.17 respectively].
That in effect will be a huge boost to Airtel for its financial worries. This is sort of a verdict that it can go for a part debt part equity route. So if thats the case, then possibly, we will see Airtel shares being battered [a la Tata Steel before Corus acquisition].

So this may be the time for retail investors to go long, really long. With or without MTN.

So, is the verdict, BHARTIARTL LONG @815.80 NEXT TARGET:Third World ?

Some updates:
7 hours ago: MTN sets terms for deal with Bharti : Apparently MTN wants the merger to spin off an ‘integrated management committee’ in which group president Mr. Nhelko should be the Chief. Mittal amenable.
6 hours ago:Undersea cable draws Bharti, MTN closer:Bharti Airtel, to join MTN group, along with 14 others to build and maintain an undersea cable system, from India to UK.

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