New Delhi: Merger talks between top managers of India’s biggest mobile phone services firm Bharti Airtel Ltd and MTN Group Ltd, assisted by investment bankers and lawyers, continued on the weekend without a final conclusion as the two sides continued to grapple with various regulatory hurdles before a deal.
“There is nothing new here (yet),” said a person close to the negotiations on the deal, but said talks between the two sides were on track.
The latest problem to have emerged is the US government’s Office of Foreign Assets Control, or Ofac, rules, which do not allow a US citizen or agency to deal with any person or entity dealing with those blacklisted under some US sanction or the other. In this instance, the countries covered by Ofac rules are Iran, Syria, Cote d’Ivoire and Liberia—countries in which MTN, Africa’s largest phone firm, has networks. Ofac rules could potentially disallow US lenders and investment banks from participating in the Bharti-led transaction.
“The Ofac regulations could stop a US-based investment bank to fund acquisition of an asset in the notified countries,” said a senior executive at a New Delhi-based law firm who requested anonymity. “Both MTN and Bharti will have to sort this before fleshing out a structure of the deal.”
Other countries covered by Ofac regulations include the Balkans, Belarus, Myanmar, Iraq, North Korea, Sudan and Zimbabwe. The Press Trust of India first reported this regulatory hurdle on Saturday.
Mint had reported on 15 May that a merger offer would be placed before the MTN board on the weekend and that a broad shape is emerging with the main controlling shareholders on the two sides—the family of Sunil Mittal, chairman of Bharti; the Makati family, an 11% shareholder in MTN; and Singapore Telecommunications Ltd, or Singtel, a 30.5% owner of the Indian phone firm—likely to own stakes in a new so-called special purpose vehicle.
Still, it was not clear how Bharti would get around ownership rules in India which cap foreign equity at 74% (including such stakes in holding or investment firms that in turn own stakes in phone firms), but the person quoted earlier said a structure was almost final. The Indian firm already has some 50% foreign equity, leaving little room for new overseas shareholders in the event of a full merger with MTN. A 4.49% stake owned by Vodafone Group Plc., if handed to MTN, would give the merging companies flexibility to that extent, the person said.
Singtel could play a key role in the final structure given the valuation of MTN in the deal could rise to as much as $50 billion (about Rs2.13 trillion), including debt (up from its $41 billion value currently), one analyst said. “If Singtel even pays $10 billion, it will give around 20-25% direct holding for it in MTN,” said a Mumbai analyst, briefed by bankers in the deal. The analyst did not wish to be named.
Other analysts such as Brijesh Rajavanshi of Networth Stock Broking Ltd agreed that the MTN transaction is more likely to see participation from investors beyond Bharti and even Singtel. “We are looking at over $20 billion in cash component, which would be too much to be raised alone by Bharti,” he told Mint last week.
Reports also suggest that Bharti may already be seeking to fund the transaction with help from outside investors. Last week, Dow Jones Newswire, quoting two unnamed people, said Bharti had contacted West Asian sovereign wealth funds in search for additional cash to back its interest in MTN. When contacted on Sunday, a Bharti spokesperson declined to offer any comment beyond what the company has already said, and officials at Singtel could not be reached for their reaction.
On Friday, shares of MTN traded at around $20.30 each, down 0.9%, on the Johannesburg Stock Exchange, valuing MTN equity at some $38 billion. Shares of New Delhi-based Bharti Airtel, which are listed on the Bombay Stock Exchange, were down by almost 0.4% on Friday to close at Rs852.45 a share. The Indian company’s stock has lost 7% since the merger discussions were confirmed by Bharti Airtel and MTN on 5 May.