Bharti, MTN reconnect $23b merger deal
ET26.05.2009
It promises to be an INDIAN SUMMER. A new government with a strong mandate to TURN THE ECONOMY around is in place. And as if on cue, India’s LARGEST TELCO has again made a game-changing MERGER bid, which can catapult it into the world’s top five
EXACTLY a year after India’s largest telco Bharti Airtel called off merger talks with South Africa’s MTN, both companies on Monday announced that they had revived talks to create a global powerhouse with revenues over $20 billion and a footprint stretching from the Cape of Good Hope across the African continent, West Asia and the Indian subcontinent. The potential deal, which seeks to tiptoe around the emotional sensitivites that scuppered their merger talks last year, will catapult the combine into the league of the top five global telcos, with over 200 million customers. While the stock markets were unimpressed with the development and beat down the Bharti stock by over 5% on concerns about pricing and cash flows, institutional investors in the company mostly reacted positively, taking the view that access to emerging markets such as Africa and West Asia will be crucial for long-term growth. MTN’s shares closed 9.2% higher at 129.9 rand on the Johannesburg Stock Exchange. The proposed $23-billion transaction involves a complex structure where both entities would pay cash and equity for stakes in each other. If it goes through, this will be India’s biggest-cross border deal, eclipsing Tata Steel’s acquisition of European steel major Corus for $12.2 billion in 2006. The tortuous formula, if it works out, will result in Bharti getting a 49% stake in MTN and the South African telco a 36% “economic interest” in Bharti Airtel (see graphic). This, both companies said, would be the precursor to the “broader strategic objective” of a “full merger.” The deal values MTN at 157 rand per share, far lower than the up to 185 rand per share that Bharti is learned to have offered last year. For the deal to go through, large shareholders in MTN must sell their stakes to Bharti Airtel. MTN chief executive Phuthuma Nhleko and four other executive directors own 26% of Newshelf 664—a management and staff-owned vehicle—which in turn owns 13.09% of MTN. In addition, it is estimated that the Lebanonbased Mikati family owns a 10% stake and PIC, a South African pension fund, a further 13.5%. Post the deal, Bharti said it would have “substantial participatory and governance rights” in MTN, enabling it to consolidate MTN’s accounts and the latter in turn would get “appropriate” representation on the Bharti board. DEAL REDIAL
It promises to be an INDIAN SUMMER. A new government with a strong mandate to TURN THE ECONOMY around is in place. And as if on cue, India’s LARGEST TELCO has again made a game-changing MERGER bid, which can catapult it into the world’s top five
EXACTLY a year after India’s largest telco Bharti Airtel called off merger talks with South Africa’s MTN, both companies on Monday announced that they had revived talks to create a global powerhouse with revenues over $20 billion and a footprint stretching from the Cape of Good Hope across the African continent, West Asia and the Indian subcontinent. The potential deal, which seeks to tiptoe around the emotional sensitivites that scuppered their merger talks last year, will catapult the combine into the league of the top five global telcos, with over 200 million customers. While the stock markets were unimpressed with the development and beat down the Bharti stock by over 5% on concerns about pricing and cash flows, institutional investors in the company mostly reacted positively, taking the view that access to emerging markets such as Africa and West Asia will be crucial for long-term growth. MTN’s shares closed 9.2% higher at 129.9 rand on the Johannesburg Stock Exchange. The proposed $23-billion transaction involves a complex structure where both entities would pay cash and equity for stakes in each other. If it goes through, this will be India’s biggest-cross border deal, eclipsing Tata Steel’s acquisition of European steel major Corus for $12.2 billion in 2006. The tortuous formula, if it works out, will result in Bharti getting a 49% stake in MTN and the South African telco a 36% “economic interest” in Bharti Airtel (see graphic). This, both companies said, would be the precursor to the “broader strategic objective” of a “full merger.” The deal values MTN at 157 rand per share, far lower than the up to 185 rand per share that Bharti is learned to have offered last year. For the deal to go through, large shareholders in MTN must sell their stakes to Bharti Airtel. MTN chief executive Phuthuma Nhleko and four other executive directors own 26% of Newshelf 664—a management and staff-owned vehicle—which in turn owns 13.09% of MTN. In addition, it is estimated that the Lebanonbased Mikati family owns a 10% stake and PIC, a South African pension fund, a further 13.5%. Post the deal, Bharti said it would have “substantial participatory and governance rights” in MTN, enabling it to consolidate MTN’s accounts and the latter in turn would get “appropriate” representation on the Bharti board. DEAL REDIAL
THE BHARTI-MTN COMBINE WOULD CREATE A CORPORATE MONOLITH. HERE'S THUMBING THROUGH THE POTENTIAL UNION REVENUES OF $20 BILLION
Subscriber base of over 200 million Fifth in the world after China Mobile, Vodafone, Telefonica and America Móvil Footprint in 26 countries Combine to ride on Bharti for expansion in India and Asia, MTN for Africa and Middle East Market cap of $60 billion.
DEAL STRUCTURE
Stock-cum-cash deal worth over $23 billion, largest Indian cross-border deal Bharti to pick 49% in MTN for about $4 billion in cash To offer GDRs and cash in return for MTN shares MTN to pick 36% economic interest in Bharti To hold exclusive talks till July 31.
POSSIBLE HURDLES
Regulatory issues in India & South Africa MTN has track record of dumping suitors, including China Mobile, China Telecom, Vodafone, Reliance Communications
SHARE PRICE MOVEMENT
Bharti’s shares closed 5.4% down at Rs 811.40 on BSE MTN’s shares on JSE rose 9% to ZAR 12,980.
New FDI guidelines to help seal Bharti-MTN deal IF THE merger were to happen, Bharti said it would be the primary vehicle for the combined entity to expand in India and Asia while MTN said that it would be the platform for expansion in Africa and the Middle East. Bharti Airtel will use the new foreign direct investment guidelines notified this year, under which its foreign holding is pegged at about 40%, to get regulatory clearances. Prior to the new norms, the foreign holding was calculated at around 70%. Bharti can benefit from the new rules because they stipulate that investment routed though companies that are owned and controlled by resident Indian citizens will not be counted as foreign investment. The new norms also provide headroom for Bharti Airtel to attract 30% more of direct or portfolio foreign investment. Analysts say the if Bharti-MTN deal materialises, that SingTel’s 31% holding in Bharti Airtel will fall to about 21%. A SingTel representative said the company would “continue to be a strategic partner and significant shareholder after the implementation of the potential transaction”. There would be a net outflow of $4 billion from Bharti and a 12% equity dilution in Bharti Airtel due to issue of shares to MTN shareholders, said BNP Paribas Securities India telecom associate Kunal Vora. “We believe this deal is positive for Bharti as it will extend Bharti’s presence into 22 emerging telecom markets and as the deal values MTN at discount to Bharti on Enterprise Value/ EBITDA. We believe that Bharti with its reducing capex requirement and free cash flow positive expectation in FY10 is well positioned to acquire MTN,” he said. But there are several ambiguities linked to the proposed merger, including the concerns that may be raised by several ministries on the foreign investment front. While some in the industry say any deal would trigger an open offer, others are of the view that this is not the case. A fund manager that ET spoke to said MTN will only be issued global depository receipts with restricted voting rights, only giving the company an “economic interest” in Bharti Airtel. Besides, MTN’s operations in countries such as Sudan, Iran and other West Asian countries may also be considered as a security threat by India’s intelligence agencies. There also concerns that Bharti Airtel’s balance sheet will be confronted with pressure on its short-term debt. Executives in the banking space tracking the deal said Bharti Airtel may raise debt of $3-4 billion to fund the proposed merger. They also said Bharti has also sounded out banks for this purpose, adding that Standard Chartered, which is advising Bharti, would underwrite $1 billion and help raise the rest of the funding. Bharti had debt of about $629 million as of March-end 2009. Another banking source, however, said Bharti has tied up with Standard Chartered Bank for debt finance of $3.5 billion, with StanChart said to have underwritten almost the whole $3.5 billion. “A host of other European banks are also looking to participate in the deal. The tenure of the deal is at over a year,” the source said. Bharti and MTN have agreed to hold exclusive talks with each other till July 31, 2009. This gives both companies about two months to finalise the deal and also ensures that rivals cannot disrupt the process with counter offers during the period. Last year, talks between both companies had collapsed over bruised egos. Bharti had then accused MTN of changing the deal structure to make it a subsidiary to the African telco. Bharti even said MTN’s proposal in 2008 was a “convoluted way of getting indirect control of the combined entity”, which would have “compromised the minority shareholders of Bharti Airtel and also would not capture the synergies of a combined entity”. But this time around, both companies have structured the proposed deal in a format that makes it look like a merger and at least for now does not kill the identity of any company. The new structure also addresses concerns in South Africa that one of the biggest success stories of its economic reforms does not end up as a subsidiary or is sold off to a foreign company. The new warmth was evident in the statements issued by both companies. Bharti Airtel chairman and managing director Sunil Mittal said the company was delighted at the prospect of developing a partnership with MTN to create an emerging market telecom powerhouse. Mr Mittal said 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. This opportunity also represents a first of its kind in developing an Indian-African initiative that would serve as a shining example of South-South cooperation,” he said. MTN CEO Phuthuma Nhleko said the “rationale for this potential transaction between MTN and Bharti was highly compelling”. “It addresses our strategic imperative of becoming one of the preeminent emerging market telecommunications companies with leading positions in three of the fastest growing wireless markets globally—India, Africa and the Middle East—with no overlapping footprint. This would create a highly visible commercial partnership between South Africa and India.” Bharti also said the potential transaction, when completed, would be expected to create value for its shareholders, synergistic benefits and enable it to further diversify into the fast-growing and relatively under-penetrated African and Middle Eastern markets. But both companies also warned that the “discussions are at an early stage and may not lead to any transaction”. “The structure and terms of the potential transaction may be adjusted to reflect further discussions between the parties and discussions with lending banks and applicable regulators. No decisions or agreement to acquire any shares or implement the transactions outlined above have been made by the boards of either MTN or Bharti,” a joint statement said. Standard Chartered Bank and its affiliate First Africa SA (Pty) Ltd are the financial advisers and AZB & Partners and Bowman Gilfillan are the legal advisers to Bharti. Deutsche Bank AG is acting as financial advisor and sponsor to MTN Group.
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