New Delhi: With exclusive talks for a proposed $23 billion (around Rs1.1 trillion) merger of Bharti Airtel Ltd and South Africa’s MTN Group Ltd set to conclude on Friday, Mint lays out possible scenarios that may unfold.
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A merger would result in the creation of the world’s third largest telecom firm, with more than 200 million customers and $20 billion of annual revenue.
New Delhi-based Bharti would acquire 49% of MTN after Johannesburg-based MTN pays cash and stock for an effective 36% stake in India’s largest telecom operator. The stake swaps would eventually lead to a full merger, the two companies have said.
In order for Bharti Airtel to acquire the 49% stake in MTN Group, it would have to pay some $6.8 billion, at 86 rand (Rs532.45) per MTN share. Bharti would see an inflow of $2.9 billion from MTN Group as part payment for the purchase of a 36% economic interest in Bharti post-transaction.
For Bharti, the net cash outflow required would be some $3.9 billion, part of which it would fund with its $1 billion cashpile.
As part of the deal, Bharti shares would be listed on the Johannesburg Stock Exchange. On Indian bourses, the shares would be renamed Bharti-MTN.
The Securities and Exchange Board of India, or Sebi, India’s capital markets regulator, said earlier this month that MTN could acquire the 36% stake in Bharti through global depositary receipts, or GDRs, without triggering a mandatory open offer as the GDRs would not come with voting rights.
Fingers crossed: Bharti Airtel chairman Sunil Mittal. As part of the deal, Bharti shares would be listed on the Johannesburg Stock Exchange. On Indian bourses, the shares would be renamed Bharti-MTN. Harikrishna Katragadda / Mint
An open offer is needed only when the GDRs are converted into equity shares with voting rights.
Scenario 1: The talks are called off. Little possibility.
Analysts say there is very little chance that the firms will call off the talks because both have applied for funding to meet the financial obligations that would result from a merger.
“There would be probably a significant foreclosure fee that they would have to pay if they don’t take the loans now,” said Kevin Trindade, a senior analyst with Mumbai based K.R. Choksey Shares and Securities Pvt. Ltd. “I expect that there will be an amicable settlement.”
Bharti has reportedly held talks with banks including Standard Chartered Plc., JPMorgan Chase and Co., Barclays Plc. and State Bank of India to raise about $4 billion, while MTN has held talks with a group of lenders to secure a $3.5 billion syndicated loan.
Scenario 2: The talks are extended. Most probable outcome.
Azmi Mikati, chief executive of the M1 Group that’s one of the largest shareholders in MTN, has said that the talks would “most probably” be extended to the end of August as the deal was a complex one involving multiple jurisdictions, Reuters reported on Tuesday.
The Lebanese Mikati family controls about 10% of MTN through the M1 Group. Mikati is also a non-executive member of MTN’s board.
“I doubt they will abandon the deal altogether but the likelihood of an extension is most probable,” said Kunal Bajaj, a director at BDA Connect, a corporate advisory firm.
“I think there will be an announcement for an extension in talks, but only by a couple of weeks—not more than three weeks,” a Mumbai-based analyst at an international brokerage firm said. He declined to be named because he is not authorized to speak to the media.
Scenario 3: Bharti and MTN change the contours of the deal. Another likely outcome.
With many MTN shareholders complaining that the price is not high enough, the deal may have to be sweetened to appease them, some analysts say. “To a shareholder, money matters. Since Bharti needs the approval of 75% of MTN shareholders, they may need to raise the cash per share ratio,” the Mumbai-based analyst said.
Singapore Telecommunications Ltd, or Singtel, one of the largest shareholders in Bharti, will see a dilution of its stake in the Indian firm by 11 percentage points to around 19% in the event of a merger. To maintain its shareholding, Singtel may look at buying Bharti GDRs from MTN shareholders after a deal between Bharti and MTN is announced.
“Singtel may buy the GDRs at a 5-10% premium in order to sweeten the deal (for MTN shareholders) and try to keep its shareholding in Bharti at a certain level,” said the analyst.
Scenario 4: An eleventh-hour deal happens before the deadline lapses. Unlikely.
Bharti and MTN Group are yet to reach agreement on a proposed merger, corporate affairs minister Salman Khursheed said on Thursday, one day before the deadline lapses. Bharti has to seek the government’s approval as and when any change is proposed in its equity shareholding,
Bharti needs approval from the Foreign Investment Promotion Board—as the transaction involves a share swap and the issuance of GDRs—as well as the department of telecommunications.
MTN needs approval by at least 75% of MTN shareholders as well as approval from the South African telecom regulator, the central bank, and the stock exchange.
“In all likelihood there will be an announcement tomorrow that the firms are extending the deadline for the talks,” BDA Connect’s Bajaj said.
When the deal happens, both firms stand to benefit. A report by HSBC Seurities and Capital Markets (India) Pvt. Ltd estimates capital expenditure savings at as much as $5 billion over the next five years. The absence of a vendor base in Africa should make it easy for Bharti-MTN in a post-deal scenario to enter into single contracts for equipment with vendors and benefit from cheaper rates in both markets for so-called third-generation mobile phone services in India and voice telephony in Africa.