New Delhi: The second merger attempt by Bharti Airtel Ltd and MTN Group Ltd ended in failure on Wednesday after the South African government rejected the union, dealing a blow to Sunil Mittal’s ambition of creating an emerging markets telecom giant with 200 million subscribers and $20 billion (Rs96,000 crore) in revenue.
Both companies are now likely to look for alternative partners.
Lost effort: Bharti Airtel’s chairman Sunil Mittal. Harikrishna Katragadda/Mint
Bharti and MTN, Africa’s biggest telecom firm, called off four months of talks the day the exclusive nature of the negotiations lapsed. The exclusive talks had been extended twice since they started on 25 May, a year after the two phone firms gave up their first merger attempt.
“This (merger) structure needed an approval from the government of South Africa, which has expressed its inability to accept it in the current form,” Bharti said in a statement in New Delhi. “In view of this, both companies have taken the decision to disengage from discussion.”
The failure would be a deep disappointment for Mittal, the Bharti Airtel chairman, who had personally driven the efforts for a deal that would have vaulted a merged entity to the world’s third biggest wireless phone firm, behind only Vodafone Group Plc and China Mobile Ltd, and made the Indian firm a global force.
“It is a huge setback for Bharti. It sets them back by at least a year and they would have to relook their Africa strategy,” said Romal Shetty, director of telecom practice at audit and consulting firm KPMG. “It is very important that they get into that market.”
About Mittal’s thwarted ambition, Shetty said: “He was really wanting this deal to go through. As an entrepreneur, you just move on.”
The announcement also disappointed South African markets. MTN asked South Africa’s stock exchange to suspend trading in its shares, which slumped 1.1% in early trading, until Thursday. The South African rand slipped 2.5%, the most in two months, against the dollar.
Valued at $24 billion, the deal would have been this year’s largest cross-border transaction, helping the two companies slash costs and better tackle competition in India, the world’s fastest growing wireless market, and Africa from rivals such as Vodafone.
The statement by Bharti did not specify the South African government’s reservations about the deal, although the attempted merger and the possibility of foreign control over a company seen as a national treasure raised concern in that country.
South African communications minister Siphiwe Nyanda said before the announcement on Wednesday that MTN should remain a domestic company. “It would be sad if we saw this entity move into the hands and management of foreign nationals,” Nyanda, a member of President Jacob Zuma’s four-month-old cabinet, told reporters in Johannesburg. “Its management must remain South African.”
Besides, South Africa’s national treasury said the proposed merger required certain exchange control and other approvals.
Bharti had said on 25 May it offered 86 rand (Rs561 today) in cash plus half a Bharti stock for each MTN share for a 49% stake, while Africa’s largest mobile-phone company and its shareholders would acquire 36% of the New Delhi-based operator. “The alliance planned between Bharti and MTN was a vision based on solid fundamentals...,” the statement by Bharti said.
“The broad structure being discussed by the two sides had taken into account the sensibilities and sensitivities of both companies and both their countries,” it went on. “Bharti and MTN are national champions and the proposed deal structure took into account their leadership in their respective geographies to ensure continuity of business—including listing, tax residencies, management, brand etc.”
Bharti wished MTN management and its board success. “We hope the South African government will review its position in the future and allow both companies an opportunity to re-engage,” it said.
Bharti also expressed its gratitude to Prime Minister Manmohan Singh for his strong support to “what could have been a transformational partnership”.
The failure of the talks was seen by analysts as setting back Bharti’s ambition to become a global telecom force, but the company said it will continue to “explore international expansion opportunities that are consistent with its vision and bring value to its shareholders”.
There are targets that Bharti could pursue, analysts said. “The African market offers many synergies for a company like Bharti and they may look at MTN’s competition in South Africa itself,” said Kevin Trindade, senior equities analyst with Mumbai-based Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.
“The economic downturn and growing saturation of mobile markets globally in Europe or the Americas could work as good targets for Bharti,” he said.
It is premature to conclude that Bharti had reached the end of the road for its overseas acquisition plans, said Monish Chatrath, executive director and head of risk advisory services and markets leader at consultancy Mazars.
“They have the hunger, they definitely would have also made substantial investments in time and otherwise to gear up for such opportunities,” he said.
Chandrajit Banerjee, director general, Confederation of Indian Industry, said: “India Inc. has had many successes in the past, and in the future too we can hope to see some large M&A by Indian companies including the likes of Bharti. The MTN deal not going through should not be seen as a dampener.”
Shares of Bharti ended flat in cautious trade at Rs418.55 on the Bombay Stock Exchange. The announcement that talks were being called off was made after the close of trading.
WHAT WENT WRONG
South Africa’s determination to retain MTN’s character as a home-grown company and as an emblem of the nation’s successful evolution from the apartheid era.
India’s inability to allow dual listing of a merged entity that may have addressed South African concerns.
The Indian regulator’s recent rule change on global depository receipts (GDRs) that may have forced MTN into unexpected additional expenditure on making an open offer for Bharti shares.
MTN’s minority shareholders may have preferred cash to GDRs as the security represents foreign ownership in South Africa. That would have meant investors selling other assets to comply with limits.
NEXT ON THE AGENDA
Possible scenarios following the end of talks between Bharti Airtel and MTN Group on a merger.
MTN’s chief executive Phuthuma Nhleko said last month MTN could buy all or parts of Kuwaiti firm Zain’s African operations if the deal with Bharti was called off.
Reliance Communications Ltd (RCom) held exclusive talks with MTN in 2008. RCom has snapped up a few small emerging-market assets and is believed to be considering more.
China Mobile Ltd is under pressure at home from an expensive buildout of a new, untested third-generation network that it may seek to expand to developing markets.
Vodafone Group Plc already owns a majority stake in Vodacom, South Africa’s biggest mobile operator, and would be unlikely to be allowed to acquire MTN’s South African assets. But it has expressed an interest in Nigeria, a key MTN market.
Latin American firm America Movil was considered a possible target for MTN after its talks with RCom broke down last year, and before MTN and Bharti resumed talks.
Although it is one of the few companies whose name has not been linked with Zain, Bharti could expand into several African markets with a stake in Zain or its African operations.
Reuters and Bloomberg contributed to this story.