Bharti and MTN to join hands; complex deal structure

The promoters of Bharti Airtel and MTN have agreed upon a merger agreement. This will be a novel deal involving an Indian company and a foreign company, with a consideration involving cash and a share swap. If it succeeds, both companies will hold stakes in each other, with Bharti holding the upper hand with a 49% stake in MTN. Of course, it is paying a stiff price to get that privilege.

It is not a done deal yet. Both parties have only agreed to discuss the transaction exclusively with each other. Earlier, Bharti was in talks with MTN which did not work out and later Reliance Communications entered the fray. No deal emerged then. In the current transaction, no competing bids will be entertained till July 31. Optimism that the current transaction will succeed is because both parties have decided upon the structure and the consideration. That would mean that the remaining hurdles will be in convincing key shareholders and obtaining regulatory nods. The complex structure of the deal itself will mean considerable explaining to be done to both shareholders and regulators.
The Deal Structure
Part 1: MTN’s side of the transaction
  • MTN plans to acquire a 25% stake in Bharti after this deal is completed.  
  • It will pay $2.9bn (Rs 13,700 crore) in cash to Bharti.
  • It will also issue new shares to Bharti, equal to 25% of its current equity capital.
  • MTN will hold a 36% stake in Bharti, once this deal is over. The additional stake, over 25%, is due to shares that Bharti will allot to MTN’s shareholders, in its side of the transaction.
Part 2: Bharti’s side of the transaction
  •  Bharti plans to acquire a 36% equity stake in MTN (based on its current equity capital).
  •  The stake will be acquired directly from MTN’s shareholders, for a price of ZAR86 rand per share in cash and half a share of Bharti (allotted in the form of GDRs).
  •  The cash consideration will work out to approximately 58bn ZAR (or Rs 32,600 crore).
  •  336.4mn new Bharti shares allotted to MTN as part of the consideration, 17% equity dilution
  •  The ultimate stake of Bharti in MTN will be 49%.
Initial observations:
Complex structure
The transaction seems quite complex, with respect to the consideration, cash and equity to be issued and the relative valuation of both companies. The respective releases from the companies do not make it easier to understand. Note that MTN’s acquisition is based on Bharti’s post-transaction or diluted equity base. But Bharti’s acquisition is based on MTN’s current equity base.
Open offer
This transaction is being done through a scheme of arrangement. MTN will be under no obligation to make an open offer in India, under the current takeover regulations.
Holding structure
It will be a cross-holding structure. Bharti will hold a 49% stake in MTN, whereas MTN will hold a 36% stake in Bharti. That’s the reason, perhaps, why Bharti has paid a substantial portion of the consideration in cash.
Benefits for Bharti’s shareholders
The company gets a significant stake in a company that is a key operator in South Africa and many other countries in the region.
We will come out with a more detailed analysis later, focusing on the merits and demerits of this transaction, both in operational and financial terms.

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