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This article was posted on May 27, 2009 and is filed under Stock Views

It is a classic dilemma that investors face. Should the immediate concerns weigh so heavy that long-term benefits should be overlooked? Should traders selling a stock, and dragging it down, worry those who have held it for long? If short-term concerns drive down a stock, should the long term story drive further buying?

Bharti’s stock was down nearly 6 per cent for the day. Traders fear that Bharti’s balance sheet may have to add a debt of nearly $4 billion to pay for the 49 per cent stake that it is looking to buy in MTN. The interest burden will eat into the earnings of the company, the market believes.
Bharti’s statement said that it has entered into negotiations with MTN to buy into the company. MTN will, in turn, buy 36 per cent into Bharti.

MTN is the dominant operator in several countries across Africa while Bharti is largely and Indian operator, with nearly 80 per cent of its revenues coming from its mobile telephony business.
But Monday’s sell-off perhaps does not factor in the fact that Bharti may have to bring about an open offer for MTN’s shareholders. Laws in South Africa require an acquirer to bring about an open offer for 35 per cent stake in the company.

There are provisions in India’s Companies Act that don’t make open offers mandatory. At present, there is not enough clarity on whether there is a similar provision in South African laws.
Stocks, typically, sell-off when such large acquisitions are made, weighed by concerns that the cash burn will dilute EPS (earnings per share). Sometimes, lack of clarity from the management makes traders more apprehensive.

The Indian market, adding nearly 10 million subscribers every month, is clearly tapering off. The target of 500 million telecom subscribers will be achieved before the target date of December 2010. The growth in subscribers is now coming from the rural areas which is far less attractive than those in urban centres.

With NTT DoCoMo entering the market, Reliance aggressively focusing on its GSM business and Vodafone rolling out their national footprint, the next round of price wars is clearly going to hurt the operators. These concerns are driving Bharti to focus outside India.
But those are clearly the short-term concerns of the market.

Now, for a moment, weigh those factors against the long-term picture. When he announced earlier this month that Bharti Airtel had achieved 100 million customers, Chairman Sunil Mittal had already been talking about the next 100 million customers.

The deal also catapults Bharti Airtel into the global stage. The combined entity will have 200 million customers with over $20 billion in revenues. That is a huge jump from Bharti’s 100 million subscribers and $7 billion revenues for the last financial year.

Bharti will be able replicate its low-cost model in Africa to drive telephony across the last known market where teledensity is still poor. MTN, from all known accounts, does not have an outsourcing model that has been perfected by Bharti. That could help drive down cost and improve margins.
That the deal is being discussed with reduced expectations, rather than at peak valuations when it was first considered 12 months ago, makes it a better for both companies too.
The challenge for Bharti, after changing the telecom landscape of the country and pioneering the outsourced model that companies are looking to replicate, is that the domestic market is nearing the end of its steep growth curve. If the same practice can be replicated on a bigger scale, the downside risk is surely lesser than what it was the first time when Bharti was testing its model.
Bharti Airtel, which was down over 8% after announcing that it talking to MTN again, is perhaps a good stock to accumulate.

source: http://profit.ndtv.com/2009/05/26123140/Take-a-longterm-bet-on-Bharti.html

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