Archive for May, 2009

MTN-Bharti : a long winding road from India to South Africa

bharti-airtel-mtn-mergerIndia’s Bharti Airtel & South African operator MTN returned to the bargaining table this week, over a merger that could create a $20 billion mobile giant. The potential deal is attractive for both parties & if successful, would create a leading telecommunications service provider group aligning Bharti’s market leading Indian business with MTN’s market leading African and Middle Eastern operations. Combined operations would result in the group enjoying leading positions in three of the fastest growing wireless emerging markets ; India, Africa & the Middle East, with no overlapping footprint & subscriber base of circa 200 million.

Under the terms of the deal Bharti will acquire a 49% shareholding in MTN, in turn MTN and its shareholders would acquire a 36% percent economic interest in Bharti, of which 25% would be held by MTN, the remainder held directly by MTN shareholders, with the long term goal being a fully merger. The two companies have agreed to continue exlusive discussions until the end of July, at which time any issues will be resolved or other potential partners will be engaged.

Sunil Bharti Mittal, Chairman and Managing Director of Bharti, said “We are delighted at the prospect of developing a partnership with MTN to create an emerging market telecom powerhouse. Both companies would stand to gain significant benefits from sharing each other’s best practices in addition to savings emanating from enhanced scale. We see real power in the combination and we will work hard to unleash it for all our shareholders.”

“The rationale for this potential transaction between MTN and Bharti is highly compelling,” said Phuthuma Nhleko, CEO of MTN. “We are excited at the prospect of teaming up with Bharti, India’s number one wireless operator and one of the most strongly capitalised players amongst its emerging market peer group. This would create a highly visible commercial partnership between South Africa and India,”

Bharti & MTN have been here before, almost exactly a year ago. Previous talks were torpedoed by a lack of clear understanding on control between the two companies. At the last minute, MTN proposed a different structure where Bharti was to become a subsidiary of MTN. Bharti retreated from the deal on the basis that it felt MTNs position was a way of gaining indirect control of the combined entity, which would have compromised the minority shareholders of Bharti. This time round it has been made clear from the start that Bharti will be the primary vehicle for both Bharti and MTN to pursue further expansion in India and Asia while MTN would be the primary vehicle for both Bharti and MTN to pursue further expansion in Africa and the Middle East. Most importantly, Bharti would have substantial participatory and governance rights in MTN enabling it to fully consolidate the accounts of MTN.

When this was announced earlier this week, I decided to hold off on posting, as I wanted to see what would forthcoming once the dust had settled & also to get a better feel for some of the more convoluted relationships involved. One of the potential major hurdles to this deal from my perspective was the stance of Singapore Telecom (SingTel) which owns a 30% stake in Bharti Airtel. Bloomberg reported that SingTel would end up with a diluted position of 20% at the end of any full merger between the two. However it would seem that this could be offset by synergies across all of the combined networks of Bharti, MTN & SingTel. In addition to its strong domestic business, SingTel owns Australian carrier SingTel Optus & holds significant stakes in carriers in Bangladesh, Indonesia, Pakistan, Thailand, and the Philippines, commanding upwards of 290 million subscribers themselves. In the same Bloomberg report, SingTel spokesman Peter Heng states that “SingTel will remain a significant shareholder and strategic partner in Bharti post any successful transaction. We will continue to equity account for Bharti, in its enlarged form post the transaction if this is successful.”

Another potential challenge that was aired, is opposition by minority shareholders in MTN, however it has been reported today that the Mikati family which owns a 10% stake in MTN via the M1 Group, has said it will back the deal. The majority shareholder in MTN is South Africa’s state pension fund PIC, with a holding of 13.5%, to date there has been no statement from them. Other minority shareholders of MTN include Allan Gray, Polaris, Coronation and Stanlib, it would seem that these companies are not so bullish on the deal, at least not until further details come clear.

The South African press also gave some weight to the position of the highly politicised trade union federation COSATU (Congress of South African Trade Unions) which recently tried to scupper the full takeover of Telkom’s stake in Vodacom by Vodafone. However, COSATU spokesman, Mr Patrick Craven, has said the MTN deal was a different situation to that of the national carrier ;  “Telkom has always been 50% owned by the public & the move was part of our policy agenda against privatisation. MTN has always been a private company”

So it would seem that conditions are favourable to the potential transaction going forward, which would bring to fruition a long held ambition for Bharti to move into Africa, which remains the most underdeveloped of emerging markets regards telecoms. By leveraging across the combined networks of Bharti Airtel, MTN, SingTel & the Bridge Alliance (11 major operatots in Asia-Pac), the new Bharti-MTN will become a major powerhouse & definitely a very attractive investment for those involved in Global & Emerging Markets.

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More pain for the dollar as China & Australia line up FTA ?

Australia China Free Trade AgreementWith China having superceded Japan as Australia’s biggest trade partner last year, the proposed Chinalco investment in mining giant Rio Tinto, could soon be part of a much larger strategic effort by the two nations, that ultimately could be a threat to the US dollar. Today, The Australia China Business Council released an independent study that shows a successful bilateral trade agreement with China would boost Australia’s gross domestic product by A$146bn ($114bn) over 20 years.

China has been on an extended spending spree for the last 18 months, with it making strenuous efforts to acquire shares in strategic assets regarding mineral & energy deposits. With China making investments in operations in South America, Africa, Australia & Central Asia, all paid for with USD from its estimated $1 Trillion cashpile.

“The Australia China Business Council has long advocated increased liberalisation between Beijing and Canberra, and this report confirms our view that a comprehensive agreement would yield major results for the Australian economy,” ACBC national chairman Frank Tudor said in a statement.

China became Australia’s largest trading partner in 2008, with two-way merchandise trade totaling A$57.92 billion. Australian exports of agricultural, mineral & energy products were valued at A$26.93 billion while imports from China of A$31.00 billion comprised manufactured products including computer & electrical equipment, industrial products & clothing. Canberra and Beijing have held 13 rounds of talks on a trade agreement over the past four years, with both parties seemingly keen to expand trade.

As we reported a few weeks ago, China is now looking to accelerate its nuclear energy program, with officials announcing they would begin construction of an additional five extra power plants this year on top of the 24 already under construction and 11 already in operation. As we previously noted, both Rio Tin to & BHP Billiton would be the major benefactors in any increase in uranium requirements from China. With uranium channeling higher on global markets, analysts are bench marking $70 per pound later this year, uranium exports from Australia could be worth $12 Bn a year in the near future.

Beijing has recently put in place currency swaps with Hong Kong, South Korea, Indonesia, Malaysia, Argentina & now Brazil. The purpose of the swaps varies from county to country. But the main benefit is that China can conduct more of its trade using its own currency and not the USD. It could also be argued that it is operating vendor financing deals in which China supplies currency to countries from which it buys a huge amount of commodities. Nouriel Roubini wrote an interesting piece recently in the New York Times, where he argues that the renminbi, although not an internationally traded currency, seems to have aspirations to become one.

Any uptick in Ozzie-Sino trade would seem to make a currency swap deal a foregone conclusion, Australia is now inextricably tied to the Chinese economy, as exports to China have increased on average by 24.8 percent annually over the last 10 years. Lets not forget that Chinalco is a government owned operation & the proposed deal would be China’s largest Foreign Direct Investment, worth a potential $19.5 Bn.

To conclude, each factor on it’s own is not enough to spark off fears that the renminbi will be all powerful in the very near future. However, where I come from there is a saying “many a meikle makes a muckle” & the Chinese strategy should not wholly be ignored. If, as I contend, Australia & China head down the path of trading in each others currency, this will be the start of something big.

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China : The beginnings of a New World Order

CB013130Much was recently made of China’s physical gold stock revelation & rightly so. On a number of boards & blogs, I have stated my view that China is trying desperately to move away from USD denominated debt & will look at a multitude of ways of doing this. To recall, the 540 tonnes of gold that China has managed to stash was bought from national producers, therefore they did not need to spend a dime on the international markets to acquire it. By acquiring gold internally, it is free to hoard physical stocks almost anonymously & help drive the price of the yellow stuff up. Chinese officials have said that they want to be at 5,000 tonnes in the near future, which at a price of $900 per ounce would by value be around 10% of their total foreign currency holdings. Obviously this won’t happen overnight, however, as far as I am concerned, this is as strong a signal as our inscrutable paymasters are wont to give.

At the same time as the gold announcement, there were other topics afoot, notably the head economist of the Chinese National Bank publishing an open essay via the banks website, calling for a new global reserve currency, which sent tremors across the news networks & triggered much verbage on various blogs.  Almost simultaneously, we found that China had also succeeded in putting in place a number of currency swaps with various nations, once again managing to hedge a little more against the once mighty dollar.

In the first quarter, China agreed a 70 billion Renminbi ($8 billion) currency swap with Argentina that will allow it to receive Renminbi instead of U.S. dollars for its exports to the Latin American country. Beijing has also signed 650 billion Renminbi ($95 billion) worth of deals since December with Malaysia, South Korea, Hong Kong, Belarus & Indonesia. This would seem to be the start of a trend in SE Asia & also potentially further afoot.

Brazil‘s President Lula is presently on a global tour, having stopped in the Middle East for talks with various Arab nations regards Brazilian particpitation in oil & infrastructure projects. What has really caught my eye though is todays coverage in the Journal of Commerce regards Lula’s impending visit to Beijing. Having signed an oil for dollars deal with China last year, Lula is now courting for further cooperation between the two BRIC giants, particularly in aviation & infrastructure. Lula has already said that he is keen for the two nations to conduct busines via currency swaps, as this will ease trade & over reliance on the USD. In 2008, bilateral trade reached a record $48.98Bn, mostly in iron ore & soy products, companies such as Vale will not be slow to take advantage, as we reported in a recent post.

My contention is that China is at the centre of a huge & concerted effort within SE Asian & other Emerging Market nations to move away from USD dependancy. Look for China to form trade hegemony in Asia, as it slowly turns away from the West economicall. And rightly so, US & Western consumers will not be in a position to absorb China’s manufacturing & export capacity for a long time to come, forcing it to look for alternative markets, whilst putting in fiscal controls as we have seen above. Fund my Mutual Fund carries a very good article on this : It’s China’s World; the Rest of us Just Live in It …. sadly, I have to agree with him.

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Chinese steel market warms up, Vale is perfectly placed

valeCompanhia Vale do Rio Doce (Vale) has recently been climbing back from lows caused by the severe drop in demand for its principle feedstock, iron ore. However, there are signs that the Brazilian mining giant may be turning the corner, as the Baltic Dry Index (BDI) has begun to show some activity off the back of speculation that the steel industry is picking up, particularly in Asia.

Vale said steel output across Asia declined by only 8.9% in the first quarter, despite the Japanese recession. This would indicate continuing strength in Chinese demand, compared to North American steel output falling by 52% & European output declining by 44%. Furthermore, Vale said its first-quarter copper output was unchanged year-on-year, aided by Chinese consumer demand for durable goods.

Steel demand is set to stabilize in the latter part of 2009, leading to “mild” recovery in 2010, according to the World Steel Association. German car registrations in March rose to the highest since 1992 after the government began paying owners to trade in old vehicles for new models. Sales in China of cars, minivans and multipurpose vehicles rose to a record in April. Car makers are the fourth-biggest steel consuming indutry, according to the association.

“The first-half will be pretty poor, but by the third or fourth quarter demand will improve,” said Peter Fish an analyst at UK based metals consulting company MEPS International Ltd. “The time is approaching when so-called destocking, in which customers use up inventories, ends and new orders will be made”

China’s imports of iron ore also spiked dramatically in February & March,  as larger iron ore producers such as Vale & Rio Tinto have been selling their iron ore to Chinese customers at a discount. Based on comments from the China Iron & Steel Association, it’s possible that small Chinese steel mills are taking advantage of the opportunity to buy higher-grade imported ore at attractive prices. Previously, imported ore was only available to large mills.

A recent report in Tradewinds shows that Vale chartered 25 Capesize vessels last month for chinese delivery, which should point to flows of iron ore resuming, although a base price for 2009 has still not been agreed with Chinese steelmakers. At present, iron ore is being sold on the spot market at roughly 20-40% discount from 2008 highs of $200 per tonne, by Rio Tinto & BHP Billiton. Valke on the other hand has dropped production & delivery in step with falling demand & has maintained last years benchmark pricing.

Chinese negotiators from Bao Steel had tried to force prices down to 60% of last years benchmark, however it would seem that Vale’s stance regards shipment may have forced China’s hand, as demand for steel is growing. Vale (NYSE : VALE) finished trading on Friday at  $17.42 off of a YTD low of $11.90 on heavier than norma buying activity.

For me Vale is in a much more enviable position than its two main competitors, Rio Tinto & BHP, as they have expended a lot of energy in last years failed takeover bid. Rio Tinto in particular is saddled with huge amounts of debt & no doubt is coming under a lot of political pressure form its would be Chinese bail out “sugar daddy”. I firmly belive that Vale will be able to add at least 50% to its stock price this year & is one of the best value buys in the commodities sector right now.

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Russia : Mobile Telesystems – the long case

mobile-telesystems1Although in Q4 2008, Mobile Telesystems (MTS) suffered a disastrous $794.8 million foreign exchange loss to reflect  book value of the company’s foreign-denominated debt due to the weak ruble, there are plenty of signs Russia’s largest mobile operator is worth investing in now.  With revenue growing 4.0% to $2.42 billion from $2.33 billion a year ago, which is healthy in the current economic climate. Taking into account that the rouble declined by 16% against the dollar in the last three months of 2008, this is a signal the Mobile Telesystems is a very robust play indeed.

MTS operates GSM based mobile services across six countries within the CIS (Commonwealth of Independent States); Russia, Ukraine, Uzbekistan, Armenia, Turkmenistan & Belarus. It also has interests in foreign mobile operations in Daghestan & India, of which more later. Within Russia, it has the highest number of post paid customers, as it looks to serve the higher end user.

In mid-April the company released subscriber figures for the 12 months ending Q1 2009 & they show some impressive growth in all markets served : Russia-8.7%, Ukraine-8.5%, Uzbekistan-67.9%, Turkmenistan-141.4%, Armenia-44.8% & Belarus-11.9%. This brings the total subscriber number for MTS up to just short of 93 million end users of which 65 million are in Russia. In comparison, the next largest operator Beeline (Vimpelcom) has 49 million subscribers, out of a total addressable base of 190 million .

With a current market cap of $13.1Bn & sale of more than $10.2Bn  in the last year, MTS looks set to be able to service its $2.9 billion in debt. With net income of $1.9Bn, MTS would not seem to be overly burdened with debt.

Looking at MTS strategy going forward, it is plain that its is working on two distinct areas; cost reduction & ARPU growth through the introduction of VAS (Value Added Services). A good example of both can be seen in the partnership with Vodafone last year, which should bring some interesting synergies; CAPEx optimizations on the introduction of the Vodafone Live! platform, advice on network deployment, retail network insight to develop distribution & the introduction of CRM services based on Vodafone Globals platform will hopefully enhance subscriber loyalty & have a positive impact on churn.

Meanwhile, MTS is also introducing a number of new 3G based services, looking to capitalise in the low internet penetration in Russia. Chief Commercial Officer Mikhail Gerchuk said the company would double the number of large Russian cities in which it has third-generation mobile networks to 50 by the end of the year, and is looking for opportunities to enter the fixed-line market. MTS hopes to use its dominant position in post-paid to attract users to a slate of new services & has recently launched a new mobile internet platform, Omlet,  to provide entertainment services to content hungry young Russians.

“We want to become what iTunes is for America,” Gerchuk told Reuters in an interview, referring to Apple’s online music store, from which more than 6 billion songs have been bought and downloaded since it launched in 2001.

Gerchuk said the relatively low presence in Russia of global brands such as Apple, Google or Amazon would help MTS. With less than 27% of Russians currently enjoying internet access & less than 4M broadband users, MTS has a good case of sucking up new users with all you can eat data plans via a mobile broadband USB offering. The company is also looking at the potential of entering the fixed line market, MTS plans to invest $1.5 billion in capital expenditures this year, including $450 million to develop infrastructure.

“We have the opportunity to give many people the chance to access the Internet for the first time,” Gerchuk said. “Acquisition is faster than building for fixed networks, but it has to be profitable”

As previously commented, MTS is actively looking for further overseas expansion, further expansion into ex-Soviet CIS countries is obvious & the company has a track record of being able to manage these sorts of deals & partnerships. Of more interest is it’s position further afield, namely India. MTS franchised it’s brand to Shyam TeleServices last year in what is becoming one of the fastest growing global mobile markets.

Shyam which currently has operations in 3 states in India, currently serves 5 million users & has ambitions to double that in the next three months. Shyam has also stated that it will be in a position to serve all 22 Indian states by the third quarter of 2010. MTS’s parent company, Sistema, owns a 74% stake in Shyam TeleServices. Gerchuk said MBT would have to monitor the situation in India before deciding whether to enter the market in earnest, and would probably do through acquisition if at all.

“India is a very competitive market, with eight operators,” he said. “There’s also the possibility of entering the market by acquisition — probably the better option in a crowded market.”

Taking all of the above factors into consideration, it points to strong growth & some very interesting potential both through new services at home & new network operations abroad. For me this is a good long term investment & I initiated a buy last week. Looking at the chart shows that MTS has returned 62% steady growth, which is pretty formidable. I’m just kicking myself that I didn’t move sooner. Mobile Telesystems (NYSE: MBT) closed on Friday at $35.15. So far the stock has hit a 52-week low of $18.36 and 52-week high of $89.24