MTN & Bharti: Former Suitors Now In Face-Off As Zain Africa Is Sold

Sunil Bharti Mittal, the billionaire chairman of India’s largest mobile-phone company, spent millions of dollars and almost two years wooing MTN Group Ltd. for its Africa business. Now he’s picking a fight with them.

Mittal was thwarted twice while pursuing a $23 billion merger with Johannesburg-based MTN that would have created one of the five largest phone companies in the world. His Bharti Airtel Ltd. then courted Zain, offering $9 billion for the Kuwaiti mobile-phone company’s operations in 15 African countries in an effort to offset slowing profit growth at home.

Bharti may sign an agreement with Zain as early as this week, three people familiar with the negotiations have said. If the deal goes through, Bharti and MTN will go from being potential partners to foes. Zain and MTN go head-to-head in five countries, including Nigeria, the largest African country by mobile-phone subscribers and population. MTN is No. 1 in Nigeria, followed by Zain.

“They’ve decided to venture into the forest on their own,” MTN Chief Executive Officer Phuthuma Nhleko said. “They would have been in a better position if we were holding their hand.”

Bharti had no choice. Bharti and MTN agreed on terms in September, yet opposition from South African authorities scuttled the deal. Reserve Bank Governor Tito Mboweni said Oct. 1 that MTN “must remain a South African company.”

Knowledge

Bharti and MTN learned much about each other during their two rounds of matchmaking. Each stage yielded thousands of pages of documents containing such details as vendor contracts, supplier pricing arrangements and the costs of installing and maintaining cell-phone towers.

Those papers, plus MTN’s $3.2 billion cash hoard and its experience in sub-Saharan Africa, portray MTN as a company Mittal may have been better off having on his side, said Taina Erajuuri of Helsinki-based Fim Asset Management.

“It’s difficult now for Bharti because MTN is such a superior company, and now they have to compete with them,” said Erajuuri, who helps manage $1.4 billion in emerging markets, including Indian equities. “MTN was the first choice, and it would have been the better buy.”

MTN has a $31 billion market capitalization, 28 percent operating margins, and expects to add 20 million subscribers in 2010 to its 116 million customer base, mostly in markets like Nigeria, Ghana and Iran. Profits of 14.7 billion rand ($2 billion) last year missed analyst estimates as the rand climbed 24 percent against the dollar.  MTN shares have gained 3.1 percent so far this year compared with a 6.7 percent decline for Bharti.

African Assets

Bharti also is buying operations that MTN once coveted. Nhleko was outbid by Zain, formerly known as Mobile Telecommunications Co., in 2006 for Celtel International BV. Zain paid $3.4 billion for Celtel, compared with MTN’s $2.7 billion bid. Zain bought companies in 13 African countries, all of which it is now selling to Bharti.

Zain’s board said Feb. 16 that Bharti’s offer could yield a $5 billion profit. It ends a seven-year African adventure for the Kuwaiti firm in which it spent as much as $12 billion to win 42 million customers in an area stretching from the Atlantic Ocean to the Gulf of Aden. It only intermittently turned a profit.

Overseas expansion is the only way for Bharti to escape slowing profit growth in India, where price competition from 10 other players -- including Japan’s NTT DoCoMo Inc. and Newbury, England-based Vodafone Group Plc, the world’s largest mobile phone company by revenue -- pushed call rates below half-a-U.S. cent per minute.

121 Million Subscribers

Bharti’s 121 million subscribers, more than the combined populations of Spain and the United Kingdom, makes it India’s largest wireless provider, closely followed by Reliance Communications Ltd, which pursued a merger with MTN after Bharti’s talks failed the first time in May 2008. Price competition has meant that much of urban India already carries cell phones, while rural customers are more difficult to attract and service.

“Mittal wants to diversify and find new markets for future growth, and most of the growth is in the developing world,” said Kurt Hellstrom, former World Chief Executive for Ericsson AB and a Bharti board member in 2004-2009. “Africa is a place India understands.”

Bharti has limited overseas experience. It started operating in Sri Lanka in January 2009, and two months ago it paid $300 million for Warid Telecom, a 3-million-subscriber company based in Dhaka, Bangladesh.

MTN’s Span

By comparison, MTN operates in 21 different countries, each with its own regulatory conditions. More than 80 percent of its earnings come from outside its home market.

The company may spend as much as $10.4 billion through 2011 building phone towers, sponsoring the World Cup in South Africa this June and introducing a $20 cell phone, according to the African Alliance South Africa Securities Ltd., a Johannesburg- based research firm.

A third of that investment may be made in Nigeria, according to the report. That compares to the $1 billion a year that Mittal told analysts Feb. 25 he intends to spend on capital expenditures in all 15 countries annually.

“A lot depends on what Bharti will do,” said Brian Neilson, head of Johannesburg-based telecom research consultant BMI-Knowledge. “Even if Bharti invests aggressively, MTN will not take the challenge lying down.”

--Bloomberg