STILL IN THE GAME

       Bharti Airtel, India's biggest mobile operator, may restart talks with South Africa's MTN while eyeing smaller targets in the Mideast and Asia. By Tony Arora in New Delhi
       For the second time in as many years, India's Bharti Airtel and South Africa's MTN have failed in their bid to create the world's third-largest mobile services company with 200 million subscribers,revenues of US$20 billion and operations in 24 countries - just behind China Mobile and Vodafone Group.
       The deal-breaker was the South African government's concern that the country would lose MTN to a foreign player. Delhi could not meet Pretoria's demand for dual listing of MTN shares post-merger since India does not yet allow full capital account convertibility.
       Official sources in New Delhi say a dual-listing structure would lead to huge tax losses to the government.
       Another major hurdle was an amendment by the Securities and Exchange Board of India (SEBI) stating that any acquisition through American or Global depository receipts (ADRs and GDRs)with voting rights would trigger a mandatory 20% open offer above the 15%threshold. This upset the terms of the proposed deal as MTN sought to acquire 36% in Bharti through GDRs.
       The South African government's pension fund, Public Investment Corporation, holds 21% in MTN and the government was under intense pressure to nix the deal on concerns that MTN's South African identity would be lost.
       Sources said a dual-listed company (DLC) clause also would weaken the supervisory authority of SEBI as it would not be able to monitor overseas stock exchanges. MTN is currently listed on the Johannesburg Securities Exchange.
       Last year, China Mobile and Vodafone also were reportedly close to striking a deal with MTN but nothing materialised.But Bharti is determined to replicate its staggering growth at home in other emerging markets, where scale is vital and penetration rates are low but rising fast. It is interesting to see why.
       The company is the market leader in India, the world's fastest growing mobile market and the second largest after China. It has nearly a quarter of the country's total mobile subscriber base.
       Telecom analysts and bankers say Bharti is keen to expand offshore as returns from the Indian market are likely to slow down in coming years. About 40% of India's 1.1 billion people have mobile phones and more than 10 million users are signing up every month.
       Subscriber growth is expected to be slow eventually as more of the population gets phones. Increasing competition in the already crowded market with the entry of international players such as NTT DoCoMo, Vodafone, Etisalat, Virgin Mobile, Sistema Telecom and Telenor in ventures with local firms has started taking its toll on revenue and margins.
       Singapore Telecommunications,Southeast Asia's biggest phone company,owns 30.4% in Bharti. Company executives say they will keep looking to expand overseas but may aim for smaller firms than MTN. One possibility on the horizon is the Kuwaiti telecom firm Zain, whose shareholders are selling a 46% stake.
       Bharti is also reportedly eyeing the Sri Lankan operations of Luxembourg-based Millicom International Cellular.Other possibilities are Warid Telecom whose shareholders are Abu Dhabi Group and SingTel, and Egypt's Orascom, said a banker who worked with Bharti chairman Sunil Mittal in the past.
       "He clearly wants to scale up and knows he needs to go outside India as well," said the banker."Maybe he will temper his global ambition for now, but that will strengthen his aim to be at least a regional powerhouse."
       Currently, the company has operations in Sri Lanka and its parent operates mobile firms in Seychelles and the British Channel Islands.
       But the collapse of talks with MTN also mean that Bharti will not have to take on debt and its strong cash position will leave it well placed for local expansion and an upcoming 3G auction in India.The government will auction thirdgeneration spectrum in December and analysts expect winning bids of $1 billion to $1.5 billion for pan-India spectrum.
       Bharti and will soon start accumulating cash even after spending on the 3G auction. It needs to deploy that somewhere,and acquisitions are the natural choice.
       The company became net cash-flow positive in the year to March 2009. With $629 million in net debt, its net debt-toEBITDA ratio (earnings before interest,tax, depreciation and amortisation) of 0.25 makes it one of the best-placed Indian telecom firms.
       As of June 30, Bharti had 63 billion rupees in cash and investments that could be converted into cash. If the MTN deal had gone through, fresh debt could have strained its balance sheet.
       3G also throws open opportunities in non-SMS services including data, music and video. This calls for more investments and here again Bharti looks comfortable.
       Apart from 3G, another growth area in India is consumer services such as direct-to-home (DTH) and television service based on internet protocol. Bharti has entered both segments and faces stiff competition from players such as Reliance Communications and Tata Sky.