Hurdles to a Bharti-MTN deal

Hurdles to a Bharti-MTN deal

Mumbai: A self-imposed deadline for exclusive talks for a tie-up between India’s top mobile firm Bharti Airtel and South Africa’s MTN expires on Wednesday, but any deal still faces regulatory and political hurdles.

The firms are working on a deal worth around $24 billion in cash and stock, under which Bharti would get 49% of MTN, and MTN and its shareholders would take a 36% economic interest in Bharti, with a full merger the long-term goal.

Also Read Bharti-MTN talks deadline looms; next step uncertain

Following are some of the hoops a deal would face:

Dual Listing

Among the biggest hurdles for the closure of the deal.

South Africa wants a dual listing structure to protect the national character of MTN, which now has operations across Africa and the West Asia, but Indian laws do not allow dual listing.

The impasse seems to be the main bone of contention, with the two firms looking at the South African government to relent, sources said.

Indian, which is unlikely to U-turn on dual listing as it would entail full capital account convertibility for its rupee currency, has said the two firms have not formally applied for dual listing.

Union finance minister has also said the two firms were not immediately looking at a dual-listed structure.

Voting Rights On GDRs

India last week altered part of its takeover rules, potentially making it harder for firms to use stock swaps for overseas acquisitions, which could hurt a Bharti-MTN deal.

The market regulator said depositary receipts with voting rights would be treated on par with regular shares, requiring GDR holders to make an open offer for 20% of an Indian firm’s shares once their holding crossed 15%.

That was a shift from July, when the Securities and Exchange Board of India (Sebi) told Bharti that MTN and - or its shareholders would only have to make an open offer if the GDRs were converted to equity shares with voting rights.

At Bharti’s current market value, a 20% stake purchase from the open market would cost nearly $7 billion. Apart from the cost, the potential increase in MTN’s holding from an open offer could threaten the structure of the deal.

Bankers have said this ruling could be sidestepped by issuing GDRs with voting rights for a stake of less than 15%. They said an open offer might not be heavily subscribed as Bharti and MTN were fast growing firms and shareholders may not want to sell.

Bharti has said the deal would comply with laws in both countries, and any required waivers would be sought when appropriate.

Minority MTN Shareholders Prefer Cash

Minority shareholders of MTN prefer cash to GDRs, bankers have said, making the deal costlier for Bharti. A GDR constitutes foreign ownership under South African regulations, which would require MTN shareholders to sell other holdings to comply with limits on foreign investment.

Banking sources have said Bharti has agreed to pay cash to the minority shareholders, and Singapore’s Singtel, which owns about 30% of Bharti Airtel, would step in with the cash to ensure its stake in the combined firm does not fall sharply.

Sweetened Offer

One of the first hurdles to the deal, now probably the smallest. MTN shareholders wanted more, and Bharti responded by raising the offer by 7%, sources said.

Some small investors of MTN said they want a bigger sweetener, probably 20-30% more.

The deal needs support from 75% of MTN shareholders.