Bharti Airtel proposes purchase of MTN

Bharti Airtel Ltd. is trying to buy MTN, the biggest mobile phone company in Africa. If the transaction works, at $19 billion, it would be the biggest transaction in outbound FDI from India so far. Bharti's market capitalisation on 9th was Rs.1.6 trillion or $40 billion. News of 8th, 9th. In 2006-07, Bharti Airtel had foreign assets which were just 0.07% of total assets. If this transaction comes through, it would be a huge jump into being a multinational firm. As with other large transactions such as the Tata Steel - Corus buyout, a great deal of international financial services are required for such events, and Indian financial firms are prohibited from producing these.

See the story in The Economist. The two papers mentioned in the story were both in the Internationalisation of firms session at the 2nd Research Meeting of the NIPFP-DEA Research Program on Capital Flows and their Consequences.

In the analytical framework employed in Graduating to globalisation by Dilek Demirbas, Ila Patnaik and myself [paper] [slideshow], telecom services are not tradeable and hence the progression from first learning to export (termed "DX") and then learning to do exporting and outbound FDI (termed "DXI") can't come about. (In 2006-07, Bharti Airtel shows exports of Rs.1335 crore. That's the net settlement between Airtel customers calling outside the country vs. foreigners calling Airtel customers. Apart from this, telecom is a non-tradeable: it's not possible for a telecom company in India to offer telecom services in Africa).

If a firm has high productivity, it can jump from being purely domestic (termed "D") to doing outbound FDI (termed "DI"). A firm which is unable to export but jumps to outbound FDI is a high productivity firm that knows how to rearrange labour and capital - in faraway countries - to produce cheaper than local firms there. That sounds like a good description of good Indian telecom companies.

The story that Ashok Jhunjhunwala tells is as follows. Roughly a decade ago, the standard engineering solutions that came from international telecom vendors induced prices for mobile telephony like USD 0.1 per minute. In India, there was a unique bulge of customers who were only available at lower prices. This market reality, coupled with competitive pressure, prompted Indian mobile phone vendors to resort to an array of hardware and software innovations which have induced the lowest cost of mobile telephony in the world.

These skills are transportable: a firm like Bharti Airtel which knows how to produce at very low prices in India can rearrange labour and capital in faraway countries to produce better than local firms there. The biggest telecom firm in Africa - also a place with a bulge of consumers who are very sensitive to prices - sounds like a good place to make such a play.

While Bharti Airtel isn't a particularly internationalised firm in terms of exporting, it has highly internationalised liabilities. The ownership pattern in March 2008 shows 20.57% in the hands of foreign `promoters' (i.e. insiders) and 25% in the hands of FIIs. Thus, 46% of the ownership of the firm is by foreigners. As with the typical large Indian firm, debt financing is not important: total borrowings are just Rs.5,310 crore compared with market capitalisation of Rs.160,000 crore. The internationalisation of liabilities is concentrated in equity financing.