The first Indian company to venture overseas chose Africa as its destination, setting up a textile mill in Ethiopia in the 1950s that eventually claimed half the market. But no Indian company has ever contemplated something as bold as the potential bid by Bharti Airtel, the biggest mobile-phone operator in India, for South Africa’s MTN, the biggest in Africa.
According to the Financial Times, Bharti has indicated it would pay 160 rand ($21.25) a share for a 51% stake in the South African multinational. Such a purchase, amounting to about $19 billion, would be the heftiest overseas acquisition ever made by an Indian firm, dwarfing the $11.3 billion that Tata Steel paid for Corus, an Anglo-Dutch steelmaker, in 2007. It would also be more than seven times the amount India invested directly in the whole of Africa from 1995 to 2004.
But no deal had been announced as The Economist went to press. Both parties were keen to stress that the talks were at an “early”, “exploratory” stage. Bharti has arranged only $12 billion of the money it would need; raising the rest would probably require the sale of more shares. And it is not the only potential bidder. MTN’s shareholders may therefore flutter their eyelashes and sit on their hands, waiting for better offers from elsewhere.
If anything, Bharti would be marrying up. MTN boasts more mobile subscribers (68m to Bharti’s 62m), a broader geographic reach (it has customers in 21 countries, including over 9m in Iran and almost 1.5m in Afghanistan) and higher profits: $4.5 billion in 2007, before interest, taxes and depreciation, compared with Bharti’s $2.8 billion in the year to March 2008. Bharti’s stockmarket value is greater, but the gap narrowed after Bharti’s share price fell, and MTN’s rose to a record high, in response to news of the talks.
These numbers do not intimidate Bharti, which has the confidence and clout of a company that is taking part in an economic miracle. India added over 10m mobile-phone subscribers in March alone, taking it past America (by some estimates) to become the second-biggest mobile market in the world. Bharti itself signed up 6.8m subscribers in the first three months of this year. It has sustained its profit margins (before interest, taxes and depreciation) of over 40% even as it offers calls for as little as one rupee ($0.02) per minute.
It also believes it has learnt some tricks that would work wonders in Africa. In both places, less than a third of the population owns a mobile phone, and monthly “average revenue per user”, a key industry measure, can be low. Bharti collects an average of 357 rupees ($8.80) per user in India; MTN’s figure varies from $24 in Congo-Brazzaville to about $8 in Sudan.
To succeed in these markets, a firm must sign up subscribers cheaply and quickly, making money on small upfront payments for a few minutes of calls at a time. This is precisely Bharti’s speciality. “They know which tricks work,” says Madhudusan Gupta of Gartner, a research firm, “and they are very strong with their marketing gimmicks.”
Flush with this domestic success, Bharti has for years harboured international ambitions that extend far beyond its modest ventures in the Seychelles, Guernsey and Jersey. It is one of a new breed of Indian firm that is “graduating to globalisation”, to cite the phrase of Dilek Demirbas, Ila Patnaik and Ajay Shah, three economists who have studied the phenomenon.
As India has opened its domestic markets, some of its bigger companies, steeled by competition at home, have become productive enough to succeed abroad. From negligible amounts five years ago, India’s outbound foreign-direct investment was $13.6 billion in 2007. Its stock of investments is remarkably cosmopolitan and was sprinkled across 127 countries in 2006, according to Jaya Prakash Pradhan of the Institute for Studies in Industrial Development in New Delhi.
Buying MTN would allow Bharti to realise its international ambitions in full measure. But an outright takeover may prove too expensive. Perhaps its talks will therefore explore other, cheaper options: a merger, for example, or a joint venture. The mobile phone has become the signature technology of the developing world. A multinational operator from the emerging markets, for the emerging markets, has an undeniable appeal. But given that MTN’s shares are already trading at 160 rand, an offer at that price probably will not be appealing enough.
