Hong Kong / Washington: A big jump in the number of mobile phone subscribers in Iran last quarter was welcome news for MTN Group, but potentially troublesome for US banks eyeing a role in the South African telco’s planned $20 billion-plus merger.
When MTN and India’s Bharti Airtel first discussed a tie-up more than a year ago, MTN had around 6 million users in Iran. Its business there, and in Sudan and Syria, has since grown -- a fact that has not escaped US banks milling around the deal.
Nobody in Washington DC is saying publicly that US banks should be barred from playing a role in the merger of the two emerging market telecom companies. Not yet, anyway.
But MTN’s annual report says 13 percent of its 2008 revenues came from Iran, Sudan and Syria -- three states where the US Treasury’s Office of Foreign Assets Control (OFAC) sets tough restrictions on US firms, effectively banning them from most direct and indirect dealings due to US sanctions.
The number of MTN’s subscribers in Iran alone rose 14% to 18.2 million last quarter.
Bank of America-Merrill Lynch is advising MTN on the deal, with Deutsche Bank . Sources involved in the offer say Goldman Sachs is advising Bharti shareholder Singapore Telecommunications, which owns 31% of the Indian company. Both BofA and Goldman declined to comment.
Several other US banks are in talks to provide financing for the merger plan, sources say, which involves Bharti and MTN buying into each other to create the world’s No.3 wireless group.
While US lenders would like a cut of the deal, sources at the banks say there is a lot of discussion at top levels to determine how to proceed within the boundaries of OFAC.
The sanctions were imposed by US presidential orders over the years for a range of issues including attacks on Persian Gulf shipping, alleged state sponsorship of terrorism, assassinations and human rights violations.
A US Treasury official declined to comment on the MTN-Bharti advisory work by US banks, but said there was some room within OFAC rules for US companies to deal cautiously with situations involving deals with foreign firms that have subsidiaries in the sanctioned areas -- as long as they are not facilitating transactions with the sanctioned countries.
“US persons are not necessarily prohibited from dealing with third-country firms that do business in sanctioned countries, although they should approach such dealings carefully,” said the official, who was not authorised to speak publicly about OFAC’s enforcement of sanctions.
For investment banks with advisory or underwriting fees at stake, that interpretation has created two schools of thought.
One is a more liberal view of the sanctions, which appear to have some wiggle-room when it comes to mandates and financings that are “third-country” as opposed to dealing directly with a company whose headquarters are in a sanctioned country.
Then there is the conservative view, which sources say has led some bankers and lawyers to steer clear of a Bharti-MTN type deal on the premise that facilitating such a transaction toes too close to OFAC, even though the merger indirectly involves the sanctioned areas.
And it’s not just Bharti-MTN that’s brought this up lately.
One M&A banker at a large US investment bank said his firm steered clear of Sinopec’s $7.2 billion deal this month to buy oil explorer Addax Petroleum, in part because of Addax’s oil fields in Iraq’s Kurdistan region.
According to OFAC, financial transactions with Iraq are allowed except with certain groups and individuals. But OFAC does place restrictions on exports.
George Kleinfeld, a trade and regulatory lawyer with Clifford Chance in Washington, DC who often deals with OFAC compliance, said the sanctions are not intended to kill off opportunities for US banks to do work on foreign mergers that involve some business in foreign countries.
“If you had a rule that no US investment bank could advise a merger between non-US companies that is one scintilla related to a sanctioned target country, there would be no cross-border advisory business done at all by US banks. It would all move to London,” he said.
Kleinfeld says he believes there could be a strong risk of running foul of OFAC restrictions if revenue from sanctioned countries is 25% or more -- a level that some lawyers use as a rule of thumb to determine a safe level of business in sanctioned countries for the foreign firms.
But he said the Treasury is deliberately vague on where the line is, putting the onus on firms to avoid sanctioned areas.
What sets the Bharti-MTN deal apart from other deals touching on the subject is its size -- at more than $20 billion it’s one of the biggest M&A deals in the world right now -- and the growth of MTN’s businesses in the sanctioned areas.
One investment banker not involved in the deal said MTN’s business in Iran, Sudan and Syria is expected to keep growing.
And that growth could bring the revenue contribution closer to the 25% benchmark but, by then, the deal could have closed and the banks could have secured hefty fees for their work.