Indian company’s share price tanks on news of complex cash and share-swap deal.
The Sunil Mittal-promoted company will acquire a 49 per cent “economic interest” in MTN, which had also held unsuccessful talks with Anil Ambani-promoted Reliance Communications last year, ahead of an eventual merger if the regulatory environment allows it.
In return, MTN will acquire 25 per cent "economic interest" for $2.9 billion and MTN shareholders will acquire another 11 per cent in Bharti Airtel. In total, MTN and its shareholders will acquire 36 per cent in Bharti Airtel in the form of global depository receipts (GDRs) that will be listed on the Johannesburg stock exchange. MTN is also listed in Johannesburg and is South Africa’s largest telco.
The deadline for the deal has been fixed as July 31.
The deal, which has been revived following significant relaxations in foreign direct investment (FDI) rules governing sectoral limits in February in India this year, would create a telecom behemoth with over 200 million subscribers, ranking only after China Mobile and Vodafone in terms of subscriber numbers (see table)
The stock markets, however, disapproved of the proposal. The Bharti share fell 5.41 per cent to close at Rs 811.85 on the Bombay Stock Exchange, on a day the Sensex rose 26 points.
In a press statement Bharti has said the deal would give it “substantial participatory and governance rights in MTN, enabling it to fully consolidate the accounts of MTN”.
Analysts said the structure was too complex. “It is not clear how both the companies manage their company accounts and how one company’s result would impact the other,” said a Mumbai-based analyst.
Under the deal that is being discussed, MTN will issue new shares to Bharti. The Indian company will also acquire around 36 per cent of MTN’s current paid-up capital from its shareholders at $10.2 per share, entailing a cash outgo of $6.8 billion. The fresh share issue will eventually take Bharti’s shareholding in MTN to 49 per cent.
In return, Bharti will issue 0.5 GDRs for every MTN share it acquires. The Indian promoters will eventually see a dilution of their 45.30 per cent stake in the country’s largest mobile service provider.
A spokesperson of the company said: “The transaction must also be seen in the context of an intention to achieve a full merger as soon as possible within the regulatory environment.”
Sources close to the deal say the net outgo for Bharti Airtel in the deal is around $3.9 billion (it spends $6.8 billion but also receives $2.9 billion) against a current market capitalisation of around $35 billion and minimal debt on its books.
MTN has a market capitalisation of around $30 billion, so raising $2.9 billion is not considered a problem.
Last year, bankers had estimated that Bharti would have had to raise over $18 billion to pick up a 49 to 50 per cent stake in the company, since Indian FDI rules at the time did not provide leeway for a share swap. This was one of the reasons the deal did not take off.
The key issue that has caused the deal to be revived is the change in the FDI rules under Press Notes 2, 3 and 4 in February this year.
Under the new rules, proportionate foreign holdings through various multi-layered investment companies would not be calculated for the purpose of FDI as long as Indians hold 51 per cent in each of these companies. Earlier, the proportionate foreign holding was calculated at every layer.
Under the new policy, Bharti has the leeway to bring in 36 per cent economic interest through FDI, which did not exist earlier because its FDI levels were hitting close to 74 per cent, the sectoral FDI limit for telecom.
The new rules, however, have been opposed by the Reserve Bank of India and other quarters and a final call might be taken in a few weeks.
Banking sources close to the deal also say Bharti does not have to go in for an open offer under the deal, which is triggered if someone acquires 15 per cent stake in a company. They say the code is not triggered if both companies are acquiring stakes in each other.
(What the Bharti-MTN deal will mean)
|# Deal will create the world’s third largest mobile service provider with over 200 million customers across 24 countries|
|# The two entities will collectively have over $20 billion in revenues|
|# Transaction value of the cash and share-swap deal: $ 23 billion|
|# Deal dependent on new foreign direct investment norms being given legal status|
(Bharti and Reliance Communications attempted to acquire the South African company last year but failed)
|6: Sunil Mittal-controlled Bharti begins talks to buy a stake in MTN|
|10: Major MTN shareholder, SingTel, backs Bharti’s bid (SingTel also has a stake in Bharti)|
|15: Bharti, MTN in talks for 50:50 cash-and-share deal|
|21: Two European companies, Deutsche Telekom and Russia’s Vimpel Communications, consider bidding for MTN|
|25: Bharti, MTN officially call off talks following differences over control of the combined entity Anil Ambani-controlled Reliance Communications (RCom) throws hat in MTN ring|
|27: RCom, MTN in 45-day exclusivity agreement to negotiate a deal|
|10: RCom extends deadline for MTN talks|
|18: Mukesh Ambani-controlled Reliance Industries begins arbitration against RCom, says it has first right of refusal to buy a stake in RCom under the terms of a family agreement|
|19: RCom-MTN talks close, no deal done|
Competing telecom companies, however, say no exemption is possible under the stock market regulator’s guidelines and that Bharti will need to seek an investment. They also question whether the new guidelines will provide them with so much leeway to allow additional foreign economic interest of another 36 per cent.
“I think it is this lack of clarity that has made them wait till July end,” said an executive with a competing telecom company. Bharti did not clarify the point beyond saying regulatory conditions will be met.
The merger of the two companies might take longer because there are numerous hurdles . For instance, affirmative action policy in South Africa requires companies to vest at least 25 per cent of their equity and 40 to 50 per cent of their management control to people of African origin.