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BSNL-MTNL merger: The wrong number dialled

Krishnan Thiagarajan

MTNL employees striking against privatization... Will history repeat itself?

THE Ministerial opposition to the disinvestment programme appears to be escalating. Late last week, the Communications Minister, Mr Pramod Mahajan, spoke of a `possible' merger of the 100 percent state-owned Bharat Sanchar Nigam (BSNL) with 56.25 per cent state-owned Mahanagar Telephone Nigam (MTNL). The outcome of this merger plan has adverse implications for disinvestment in the telecom sector. This is because the merged entity will be worth Rs 60,000-75,000 crore, and even a 25 per cent equity stake will be beyond the reach of most telecom majors.

It may be prudent to put the merger plans on hold and place MTNL on the disinvestment block immediately, to be followed by the BSNL disinvestment at an appropriate time.

Synergies galore: The dice is clearly loaded in favour of BSNL in this merger. By merging with MTNL, it is likely to gain control over the lucrative circles of Mumbai and Delhi for both basic and cellular telephony . As these two metros enjoy the highest average revenue per user (ARPU) in the country, it will help bolster the overall revenue potential and improve viability of BSNL's operations in the long run.

Moreover, with the entry of the fourth cellular operator and consolidation in the basic services segment, these two metros are poised to be the next battleground for subscribers between the state-owned BSNL/MTNL and the private operators. Once MTNL comes under the BSNL umbrella, the combined operations will have several sustainable competitive advantages. The nation-wide footprint, deeper pockets and greater marketing clout may help the combine protect the high value MTNL subscribers in basic telephony from being weaned away by private operators and engage in prolonged tariff wars for marketshare in celluar telephony in these two metros.

Second, given the relatively healthy cash flows of MTNL and steady contribution from the lucrative circles of Mumbai and Delhi, the merger is likely to help BSNL narrow the yawning resource gap between its proposed yearly investments for telecom network deployment and the internal resources available. Finally, this merger may also obviate any duplication in investments in national long distance telephony by MTNL.

MTNL's loss of identity: From MTNL's standpoint, the merger will result in its corporate entity being completely subsumed in that of BSNL.

In practically every financial or operational parameter — revenues, post-tax earnings, assets, employee strength or network coverage — MTNL will be swamped by BSNL.

The difference in the scale and size of operations of BSNL vis--vis MTNL leaves hardly any doubt on who will call the shots, post-merger.

MTNL shareholders' dilemma: Theoretically, the merger deal can be structured in two ways — through an open offer or a share swap deal.

BSNL will favour the latter because it will help enhance its equity stake in MTNL without any significant financial outflow.

Secondly, the share swap ratio will shrink the minority shareholders equity in MTNL to a low percentage, post-merger, from the current levels of almost 48 per cent.

No wonder, the shareholders have given a thumbs down to the merger, marking the MTNL stock down.

BSNL will avoid the open offer route as buying out a 48 per cent equity stake at current price levels will entail a stiff financial outgo of over Rs 3,500 crore. That would be a costly diversion of the BSNL's cash.

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