Mumbai / New Delhi: Merger negotiations between senior managers of India’s biggest mobile phone services company Bharti Airtel Ltd and Johannesburg-listed MTN Group Ltd, a phone firm with interests spanning Africa and west Africa, will take a decisive turn next week with the two sides set to decide which funding structure to opt for in a potential amalgamation, a person close to the discussions said.
The funding structure is important because it will decide how many fresh shares the acquiring company will potentially have to issue, thereby diluting its earnings per share and price of shares. Shares of Bharti Airtel, on market expectations that the New Delhi firm will be the buyer, have already lost 6.5% in value since the merger talks were confirmed by the two companies late on Monday.
“It is still blue sky discussions between senior executives, bankers, lawyers and others,” the person said, asking not to be identified because the talks were still at an early stage. “But, some direction should emerge next week on whether it is a pure cash offer, cash and stock, cash-stock-debt... The stage where the (MTN and Bharti) managements will recommend a deal is far away.” The person did not specify a date next week when this choice would be made.
A deal paid for only through shares, which is highly unlikely, will dilute Bharti Airtel’s equity by up to two-fifths. Financial analysts such as Kawaljeet Saluja and Rohit Chordia at Kotak Institutional Equity Research in Mumbai say Bharti Airtel may have to dilute its equity up to 40%, if the company has to raise around $16.1 billion or Rs64,400 crore (at $21.8 a share), if it funds the MTN acquisition on its own. “We believe that viable option is for joint bids with another partner, which can facilitate a complete buyout without stretching the balance sheet of Bharti,” the analysts wrote in a note earlier this week.
It is likely then, say analysts, that Bharti Airtel, which has $163 million in cash reserves and a long-term debt-equity ratio of nearly 35%, according to Reuters estimates, will also depend on cash and debt to pay for the acquisition. And, although appetite for acquisition finance is drying up among lenders in the US and Europe, the person quoted earlier, said the Indian phone firm had what are called “letters of comfort” from “more than a dozen” global banks “running into several billion dollars” to finance the transaction.
Earlier this week, the Financial Times, which first reported Bharti Airtel’s interest in MTN, had said the Indian company had tied up for $12 billion in debt financing for the deal from lenders including Standard Chartered Bank Plc and Goldman Sachs and Co.
Bharti Airtel’s shares closed at Rs842 each on Friday, valuing the company at just under $41.6 billion, while MTN shares ended trades at Rand 15,330, boosting the value of the Johannesburg-based firm at $37.17 billion.
Another person close to the bankers who have committed to fund Bharti Airtel in the MTN bid said the Makati family, a significant MTN shareholder with a nearly 11% stake through a company named M1 Ltd, had given its in-principle approval to the deal. But before the family gives its formal assent to the deal, the MTN board will first have to accept Bharti Airtel’s offer. This could not be independently verified by Mint.
What makes MTN attractive to acquirers is its 68.2 million customers across 21 countries, including South Africa, Nigeria, Iran and Cyprus, netting profits of $1.58 billion on revenues of $9.62 billion. The more-profitable Bharti Airtel, in comparison, with some 62 million customers reported net profits of $1.67 billion on $6.76 billion sales.
Meanwhile, rating firm Standard and Poor’s (S&P) said it may review Bharti Airtel’s rating as its closes in on the MTN acquisition.
“While a prominent overseas investment adds diversity to Bharti’s businesses and cash flows, the financing and the debt requirements are of greater concern, especially since Bharti has budgeted capital expenditures of about $3.3 billion per annum,” Yasmin Wirjawan and Anshukant Taneja, rating analysts at S&P wrote in a note on Friday. S&P rates Bharti Airtel’s debt BBB-, the lowest investment-grade rating, with a stable outlook.
Fitch Ratings, another international rating firm, said it’s not taking any rating action because of insufficient information on the possible transaction and the likelihood of other bids for MTN.
Fitch has a BB+ rating on Bharti’s debt, its highest non-investment grade rating, with a stable outlook.
Andrea Tan and Harichandan Arakali of Bloomberg contributed to this story.