Network incompatibilities could make a deal between MTN and India\u2019s second largest mobile operator Reliance Communications difficult. The two companies announced this week that they had entered into exclusive talks following the decision by Bharti Airtel, Reliance\u2019s principal rival, to walk away from negotiations with the SA-headquartered cellphone group.<\/p>\n
Reliance has 46m mobile customers in India \u2014 MTN has 68m across its 21 markets in the Middle East and Africa \u2014 and operates a national backbone network consisting of more than 60000km of fibre-optic cable.<\/p>\n
But Reliance\u2019s mobile network makes extensive use of CDMA technology, which is incompatible with the GSM standard employed by MTN. Though Reliance has aggressively been building a GSM network, analysts say it could be difficult for a combined group to negotiate big discounts from telecommunications equipment manufacturers \u2014 which is one of the factors driving blockbuster acquisitions in global telecoms.<\/p>\n
While MTN is almost solely focused on mobile telephony, Reliance Communications also sells broadband Internet access over fixed lines, wholesale services to other operators, and consults to corporate customers on their IT strategies.<\/p>\n
Though it is Reliance that approached MTN about a possible deal, the SA group is by far the bigger of the two. In the year to March 2008, Reliance reported sales of US4,8bn and earnings before interest, tax, depreciation & amortisation (Ebitda) of $1,3bn; in the year to December 2007, MTN notched up sales of R73,1bn (9,5bn at R7,70\/) and Ebitda of R31,8bn (4,1bn).<\/p>\n
Reliance and MTN have agreed to enter talks on an exclusive basis for a period not exceeding 45 days.<\/p>\n
But Irnest Kaplan, MD of Kaplan Equity Analysts, says he has the same reservations about Reliance as he had about Bharti Airtel. \u201cMTN is an incredibly good investment for the next two or three years,\u201d he says. \u201cFor investors to part with their shares, [the bidder] is going to have to offer a hell of a lot of money.\u201d<\/p>\n
Bharti had reportedly secured up to $60bn in funding from US and European banks for a deal that would have valued MTN at up to R175\/share.<\/p>\n
Kaplan says that, as with the Bharti talks, it would make more sense if it were MTN that was doing the acquiring.<\/p>\n
It is clear that MTN president and CEO Phuthuma Nhleko is not keen to do a deal that would undermine his management team\u2019s control over a combined entity. The Bharti talks broke down after MTN proposed a change in the deal structure that would have led to Bharti effectively becoming a subsidiary of MTN.<\/p>\n
The new structure would have \u201ccompromised the minority shareholders of Bharti Airtel and also not have captured the synergies of a combined entity,\u201d the Indian group said in a statement at the weekend. \u201cBharti\u2019s vision of transforming itself from a homegrown company into a true Indian multinational telecom giant, symbolising the pride of India, would have been severely compromised and this was completely unacceptable.\u201d<\/p>\n
Frost & Sullivan analyst Lindsey McDonald is not surprised the talks broke down. \u201cPart of MTN\u2019s intrinsic value rests with its corporate culture. Whatever the shape of the company moving [forward], there is little doubt that the retention of the MTN brand and culture would be two of the most important aspects management and shareholders should ensure.\u201d<\/p>\n