New Delhi/Mumbai: The Sunil Mittal-controlled Bharti Airtel Ltd and South Africa’s MTN group have revived merger talks that could clear the way for the creation of one of the largest mobile phone companies in the world, with close to 200 million customers and combined revenues of at least $20 billion (Rs94,400 crore).
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The two firms made separate announcements on Monday that they would continue with exclusive negotiations till 31 July, and thus not talk to other suitors until then.
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This announcement comes almost exactly a year after the two firms broke off merger talks because of differences over who would control the combined entity. Bharti and MTN came back to the negotiating table in April, according to a person with knowledge of the talks, and came to “an understanding” late last week.
The current deal involves a complex mix of cash and shares that has foxed many analysts and investors. After welcoming the deal in early trading in Mumbai, investors sold Bharti shares which ended the day at Rs811, or 5.4% below their Friday close.
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“The initial reaction was a little over the top,” said Angel Broking analyst Harit Shah. He said investors are worried about equity dilution and the “significant amount” of debt Bharti would have to take on under the proposed terms of the deal.
“The problem is now that the Bharti stock becomes very complex and it may not be so easy for a layman investor to understand the stock properly. Apart from the crossholding, the accounting for the share swaps needs to be understood completely,” said an equity analyst who asked he and his firm remain anonymous.
Similar worries may crop up in MTN’s home country. “The South African shareholders are not too happy and have decided to wait and see as it still does remain a complex deal,” said Jonathan Kennedy-Good, a telecom analyst at UK-based Investec Securities. MTN shares were trading at 129.9 rand at 8.55pm India time, up 9% from Friday.
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The combined entity would be neck and neck with Telefonica SA, which as of end-March had 198 million customers. China Mobile with 477 million and Vodafone Group Plc. with 303 million rank first and second, respectively. A Bharti-MTN deal would also be India’s largest cross-border deal, almost twice as large as Tata Steel Ltd’s purchase of European steel maker Corus in 2007.
In a deal worth at least $23 billion, Bharti and MTN said, Bharti would pay in cash and shares for 49% of MTN while the African firm and its shareholders would pay cash and shares for an effective 36% stake in the Indian telco.
MTN will pay $2.9 billion and shares equivalent to 25% of its share capital to Bharti Airtel in return for 36% in the Indian firm. The New Delhi- headquartered firm, in turn, will buy 36% of MTN, controlled by the Lebanon-based Mikati family and a trust representing senior management and employees, by offering 0.86 rand (or $10.44) and 0.5 Bharti Airtel share for each MTN share so acquired through a global depository receipt listed in Johannesburg. Together with the earlier 25% crossholding in MTN, Bharti Airtel will then own 49% in it.
Both the Mikati family and the Mittal founder family at Bharti Airtel, as also the senior MTN management led by chief executive Phuthuma Nhleko, will not buy or sell shares in the deal. Singapore Telecommunications Ltd, which has a 31% stake in Bharti Airtel (directly and through holding firms), will remain a strategic partner and major shareholder. Bharti is valued at some $32.5 billion on Monday’s closing and MTN at $29.5 billion at 8.55pm India time.
The cash outflow at the Sunil Mittal-chaired company will be around $7 billion, which net of the $2.9 billion received from MTN and up to $1 billion in cash and cash equivalents, will reduce to between $3 billion and $4 billion, according to an analyst with a domestic brokerage, who asked he and his firm not be identified.
The person quoted earlier said Bharti Airtel had received an assurance of syndicated debt of “under $4 billion” from a bank led by Standard Chartered Bank Plc. A second person close to the deal confirmed this.
An investment banking unit of the bank is advising Bharti on the transaction, while MTN has retained Deutsche Bank for investment counsel. Mittal sits on the board of Standard Chartered.
Some Indian analysts said the firms would not have embarked on new talks unless control issues had been settled. “I doubt if the merger plan by the two firms that went awry last year will come back to haunt them. One wouldn’t go back a second time unless one is sure,” said Rajesh Jain, chief executive at Mumbai-based Pranav Securities. Reliance Communications Ltd, second-ranked rival of Bharti Airtel by customers, had held merger talks with MTN last year in May after similar negotiations with Bharti collapsed then over differences on how to structure the deal then.
On Monday, however, Bharti Airtel and MTN made it clear that the complex-structured proposed transaction was a first step to a full merger. “The broader strategic objective would be to achieve a full merger of MTN and Bharti as soon as is practicable to create a leading emerging markets telecom operator, which today would have combined revenue of over $20 billion and a customer base of over 200 million,” the companies said in separate statements.
The deal, if it concludes successfully, assures Bharti Airtel of “continuing growth over the next few years and offers a nice buffer against competition, rural markets, MVNOs...,” said Mohit Rana, senior principal at consultant AT Kearney & Co.’s Gurgaon office. “It opens new vistas for Bharti and future organic and inorganic growth opportunities.”
Africa and large parts of West Asia have high customer billings—also known as average revenue per user, or Arpu, in the industry—running up to $18 a month in countries such as Syria and South Africa presenting a revenue expansion opportunity for Bharti, which like most Indian players rarely has Arpu rates of more than $7.
Also, the opportunity for growth in Africa and India is a positive for both sides, another telecom expert said. “Both Africa and India hold 33% of the world’s population and both these markets have around 40% penetration allowing for a lot of opportunity,” Romal Shetty, a director at audit and consultancy firm KPMG International’s India offices said. “There are also the synergies that can be leveraged by both firms in terms of costs as well as the outsourcing that Bharti is well known for.”
It was not immediately clear how the deal would test India’s foreign ownership rules in telecoms that cap overseas equity at 74%. Such ownership in Bharti Airtel, if it includes the foreign equity in its holding companies, is already some 67%. But, if the rule is interpreted as the foreign stake only in Bharti Airtel, the company has some headroom for equity change.
A corporate law expert, requesting anonymity, said the final call on the change would rest with the country’s stock market regulator, the Securities and Exchange Board of India. “We believe that the current proposed transaction structure will not trigger a mandatory tender offer in India,” said a Bharti spokesman in an email.
Graphics by Sandeep Bhatnagar / Mint
Devidutta Tripathy and Gugulakhe Lourie of Reuters and Erika Kinetz of AP contributed to this story.