'Bharti-MTN deal will trigger open offer clause'

Contrary to assertions by Bharti Airtel’s management, the share-swap deal with South African telecom major MTN may trigger the open offer clause, according to a senior official in the Securities and Exchange Board of India (Sebi).

Sebi has based its assessment on Bharti Airtel’s official announcement, since the company has not yet approached the market regulator with a formal proposal.

Under the takeover code, an open offer for 20 per cent of a company’s shares has to be made in two circumstances — either the promoters buy more than 5 per cent in the company within a year or another entity acquires 15 per cent.

The reason the takeover code is triggered, the Sebi official said, is that Bharti Telecom, Bharti Airtel’s promoter company, would end up indirectly buying a little over 12 per cent in the Indian telecom company via its investment in MTN.

Under the deal announced on Monday, Bharti Telecom will be buying 49 per cent in MTN. In return, MTN is buying 25 per cent in Bharti Airtel. Calculated on a pro-rata basis, this means that Bharti Telecom will end up buying about 12 per cent in Bharti Airtel (see chart), triggering the open offer code.

On whether MTN is liable to make an offer to Bharti Airtel’s shareholders, sources close to the transaction argue that although MTN is buying 25 per cent of Bharti Airtel’s shares, Bharti Telecom is also buying 49 per cent of MTN. Effectively, therefore, MTN is buying less than 13 per cent of Bharti’s shares, so the open offer code does not get triggered. Sebi is examining whether this argument holds.

Investment bankers handling the transaction also argue that since MTN is acquiring the stake through global depository receipts (GDRs), in which the voting rights are vested with the custodian and not the GDR holders, it is exempted from the takeover code.

Others bankers argue that it is not correct to equate the MTN issue with an ordinary GDR issue. “A GDR issue is like a public issue in which the company issues shares to a large number of investors. But in this case, the GDRs are issued to the strategic investor — MTN — which will also have a board position in the company and therefore have voting rights that GDR holders do not have”.

The Bharti-MTN deal has already become a test case for whether the new foreign direct investment rules can be circumvented. Now, it could also become a test case for future takeovers.

Should the takeover clause be triggered, the Bharti group may end up paying as much as Rs 33,000 crore more than the deal originally bargained for, based on the company’s share price of Rs 900 on Monday, the day the announcement was made. The company has 1.9 billion shares, so 20 per cent will entail a payout of more than Rs 30,000 crore.

If the deal goes through in its current form without triggering the open offer code, all future mergers and acquisitions will adopt the same route.