India Broadband Forum

Rameshjeee

Decoding the proposed Bharti-MTN deal

After almost a year, India's Bharti Airtel and South Africa's MTN Group are back to the talking table. The duo have restarted merger talks to create $20 billion telecom entity.

In fact, at a time when global giants are complaining about a cash crunch and putting ambitious plans on hold, Bharti Airtel has relaunched its audacious merger bid with MTN that could create a $61-billion transnational telecom goliath with combined revenues of $20 billion and over 200 million subscribers across Africa, Asia and Middle East.

Here's decoding the deal that -- if it goes through -- will create a telecom entity which will be among the world's 10 biggest companies.

How the deal may go
Bharti will buy 36 per cent of MTN’s existing equity from MTN shareholders. It will pay for this in two parts - a cash portion of 86 Rand ($10.34) per share totalling $7.03 billion; and half a Bharti Airtel share for every MTN share it gets (about 34 crore shares worth roughly $6.2bn at Friday's price) MTN will buy 25 per cent of Bharti Airtel’s post-deal equity through fresh issue of Bharti shares.

It will pay for this again in two parts - $2.89bn in cash and fresh issue of MTN shares to Bharti equivalent to 25 per cent of MTN's existing equity (worth $7bn). At the end of this complex swap, Bharti will hold about 48.8 per cent of MTN’s expanded equity, while MTN will hold roughly 36.4 per cent of Bharti's enhanced equity. Bharti will then have to pay MTN a net cash amount of $4.14bn.

Biggest-ever cross-border deal
The Bharti-MTN deal, if it goes through, will usher in the next round of the Indian telecom M&A story. At an estimated ticket size of $23 billion, this will be the biggest cross-border deal that India Inc has been involved in, and twice as much as what British telco Vodafone paid to acquire a little over half of Hutchison Telecom International’s Indian operations in early 2007.

Proposed $23-29 bn deal would be biggest ever M&A transaction involving an Indian company, almost double the previous highest of $13bn paid by Tata Steel for Corus. It would be the third largest deal in the world in 2009 so far, after Pfizer’s $64bn buyout of Wyeth and Merck’s $46bn deal with Schering-Plough Excluding pharma, Bharti-MTN deal would be the largest in world this year so far. Bharti-MTN’s combined subscriber base of 200m would make it the world’s 4th-largest telecom entity, and largest outside China. The top 3 are China Mobile (472m), China Unicom (247m) and China Telecom (237m).

To beat US telecom giants
If the deal goes through this time, it will make Bharti the largest telecom entity in the world (by number of subscribers) outside China. Add MTN’s 100 million subscribers to Bharti’s 100 million, and the combined figure of 200 million will see Bharti comfortably leapfrog US giants Verizon (122m) and AT&T (108m), among others. Bharti will then emerge as the world’s fourth largest telecom company, behind only China Mobile (472m), China Unicom (247m) and China Telecom (237m).

Gets access to 21 nations
Bharti is already the world’s sixth largest telecom company, purely on the basis of the booming Indian economy. But a deal with MTN would give it access to 21 more countries, allowing it to boast of being a true Indian multinational, and a champion player in emerging markets.

In one sense, Bharti is already a global leader. Its cost structure is among the cheapest in the world. Bharti pioneered the practice of outsourcing core activities and striking innovative payper-use deals with suppliers. As a result, it is able to make money even though Indian mobile tariffs are among the lowest in the world.

Arun Sarin, former CEO of Vodafone globally, has often said that Vodafone has tried to apply many of the things it learned here globally. Now, Bharti has a chance to not just serve as a global case study, but to apply its own tenets internationally

Become MTN's largest shareholder
If the latest talks work out, Bharti will become MTN’s largest shareholder. Bharti Telecom will continue to be the largest shareholder in Bharti and together with MTN and SingTel will have a majority economic interest in Bharti. Bharti’s investor base would be widened by existing MTN shareholders holding a direct economic interest through fresh GDRs proposed to be listed on the Johannesburg Stock Exchange.

Gets access to emerging markets
Bharti Airtel’s institutional investors have given a thumbs up to the company’s plans to merge with South African telecom major MTN as they feel that access to emerging markets such as Africa and West Asia is crucial for the long-term growth prospects of the company.

Fund managers with exposure to Bharti feel that with the Indian telecom market showing signs of saturation, the stock-swap deal will be critical for the company’s next phase of expansion. “The deal is a good opportunity for Bharti to enter into a lesser-penetrated market like Africa, especially when the company is generating free cash flows,” says Mahesh Patil, co-head for equity, Birla Sun Life Mutual Fund, which holds a 0.07 per cent stake in the company.The valuations that have been offered may be at a premium to MTN’s share price, but its valuations are cheaper than Bharti’s.

Gets 'foreign-owned' tag
Bharti Airtel’s proposed merger with South African telecom major MTN through a complex stock-swap and cash deal may get the company classified as “foreign-owned”, according to Indian norms, thus significantly impacting its future investments in sectors such as organised retail in the country where foreign direct investments (FDIs) are capped to certain limits.

The merger, which will bring in additional foreign investment into Bharti Airtel, could convert India’s largest telecom company into a foreign-owned entity, if MTN’s total investment adds up to more than 50 per cent of its enhanced equity.

Regulatory speedbreakers ahead
The fact that the two companies have returned to the negotiating table after almost a year spells promise for the deal. However, the 21 African, Middle East and Asian countries that MTN operates in are regulatory minefields and could pose both a potential speedbreaker as well as a challenge for Bharti. The proposed transaction will require regulatory approvals in India, South Africa and countries in which MTN operates.

Bharti and MTN will be actively engaging with the appropriate regulatory bodies to ensure that the necessary approvals are obtained, Bharti Airtel said. Whether the recently restructured Competition Commission of India will need to review and bless this deal remains a question. Fortunately for Bharti, DoT’s 2003 M&A guidelines on telecom mergers do not impact cross border deals.

Source: Indiatimes - Infotect

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