Dial M for Merger

Consider the figures. The market cap of the combined entity should be around Rs 50,000 crore. At this level, it would rub shoulders with the likes of ONGC, Reliance, TCS and IOC — and find a place in the Top Five in market capitalisation ranking. The combined turnover could be anywhere in the region of Rs 33,000 crore. Profits would be in the region of Rs 3,000 crore.

“Considering BSNL is four times the size of MTNL, and its profit margins are reasonably well — thanks to its sheer size — it could command a good premium in the capital market. If an IPO is planned, the government can ask for a premium of minimum Rs 100 on a Rs 10 face-value share,” said the CEO of an investment bank in the race to become the financial advisor on the deal for the government.

To be sure, the government has not taken a final decision on the matter. It has recently invited expression of interest from merchant bankers to advise the government on the issue. Six top merchant bankers are already in the race. If and when a decision is taken, it’s expected to change the face of the capital market and the telecom sector.

“One of the most logical options for the government could be to do an NTPC with BSNL and add the money to MTNL at the time of merger,” said Pashupati Advani, Director, Advani Share Brokers. The government recently raised over Rs 5,300 crore by divesting 10 per cent stake in NTPC. BSNL could well tread the same path.

But there are several options before the government and merchant bankers on the BSNL-MTNL issue.

• Merge BSNL with MTNL and get automatically listed.

• Divest 5 per cent stake in BSNL, get it listed and then merge with MTNL.

• Buy back MTNL’s shares, then merge it with BSNL and get it listed.

• Create a holding company and merge MTNL with BSNL.

• Make MTNL a subsidiary of BSNL and then get the combined entity listed.

When contacted, a cross-section of bankers and brokers preferred the listing-and-merger option. That is, list BSNL first — a la NTPC — and then merge it with MTNL.

There are advantages for the two government telecom companies to merge. As a single entity, it can easily take on private players who are breathing down their neck now. “The merger will mean that the state-owned companies will be even better placed to compete against private operators as economies of scale and profitability levels will improve,” says Lucy Norton, telecom . analyst for the London-based WMRC.

But there are some roadblocks ahead. “Since MTNL is listed on the NYSE, we cannot ignore what the SEC — the US market regulator — has to say on the same. You will have to follow strict corporate governance norms and listing standards if you want to retain the NYSE listing,” said another investment banker who is in the race to bag the advisor’s mandate from the government.

Another big challenge will be the cultural difference between the two companies. Even the salary structure of the two companies is different. For now, obviously, the market thinks these issues can be tackled later.