What could have saved the Bharti Airtel-MTN deal?

Bharti Airtel and MTN were unable to convince the South African government to accept their cross-border merger proposal. The government did not object to the merger per se but to the structure, which was outside the current regulatory environment. The two companies had proposed a structure, which ostensibly involved MTN taking up a stake in Bharti by subscribing to ADRs/GDRs. Bharti would in turn take up a stake in MTN, which was a direct transaction.

Apart from the first press release, which was issued in May 2009, both companies have been silent on the progress of the merger or even changes to the structure. So there is only speculation on what could have derailed the merger, with the most common speculation being the issue of dual listing.

What could have possibly queered the pitch? Let’s look at the transaction for some clues:

  • MTN would acquire a 25% post-transaction stake in Bharti. It would pay for this by issuing 25% of MTN’s current equity capital and $2.9bn in cash. Implicit in this is the issue of MTN shares to Bharti.
  • Bharti would acquire 36% in MTN and in return give shareholders 86 rands in cash and 1 Global Depositary Receipt for every 2 MTN shares acquired. One GDR will equal one Bharti share and will be listed on the Johannesburg Stock Exchange.
  • Bharti would end up with a 49% stake in MTN. That would mean it holds the upper hand. It owns a higher stake in MTN, and because of the cross-holding the Bharti promoters control a higher stake in their own company too. That is, apart from the promoter shareholding in Bharti Airtel, the company’s 49% stake in MTN, gives it control over the 25% stake in Bharti too. The dice appears clearly to be loaded in favour of Bharti.
  • Now, Bharti owns equity shares in MTN whereas MTN owns only GDRs. Also, Bharti was keen that the acquisition should not result in an open offer for Bharti Airtel. The only way it could have achieved that was by inserting a clause in the GDRs, denying the shareholders of any voting rights. That further tilts the balance in favour of Bharti.
  • It was then the issue of dual listing was raised. Under this, Bharti’s GDRs would be listed on the Johannesburg Stock Exchange and MTN’s shares, in some form, would be listed on the Indian stock exchange. Technically, this should have been possible through the Indian Depositary Route. For the Indian government, changing the capital account convertibility rules for one deal was not on the cards.

The South African government’s statement makes it clear that the transaction needed some approvals from their side, because it was outside the exchange regulatory framework. The sub-text seems to indicate that they wanted reciprocity from India for either this or future deals. India seems to have baulked at that request. That’s why the statement goes on to say that South Africa’s Treasury invites its counterparts from India (the Finance Ministry) to develop a mutually beneficial mechanism for such mergers.

If the India government’s opposition to capital account convertibility was evident and the South African government’s reluctance to approve the deal in the current structure was also clear, why did the two parties not restructure the deal? The deal could have been structured as a normal transaction.

Cash, it appears would be the main reason. In this transaction, shares are being used as a key currency on both sides. Consider this: at the time the transaction, was announced Bharti’s market cap was Rs 154,000 crore and that of MTN was Rs 125,439 crore. Imagine if they had to pay cash for their respective legs of the transasction, to acquire a 25% stake in Bharti and a 36% stake in MTN. Stock as a currency is difficult to implement, even when both stocks are listed on the same bourse. Using it for a cross-border transaction was imaginative but not realistic.

Could the deal have been saved?
In the current structure, Bharti would have ‘substantial participatory and governance rights’ in MTN. MTN’s economic interest in Bharti was considerably lower.

Bharti could have as well set up a subsidiary in South Africa, or some other neutral country, which could have acquired a stake in the company. It could have funded this company through a fresh GDR/ADR issue and used the proceeds for the acquisition. But that would have either meant considerable equity dilution or leveraging.

Still, MTN would have continued to exist in its current form; only its ownership would have changed. It could have still been the vehicle for all telecom ventures in Africa. But a 49% stake in cash, at the same valuation would have meant paying out about Rs 60,000 crore. That would have blown a big hole in Bharti’s consolidated balance sheet, either in the form of a large debt burden, or goodwill arising out of the acquisition. And, of course, if MTN wanted to acquire a stake in Bharti through the normal route, the acquisition cost would have been substantial for it too.

Both parties tried to achieve their objectives through a route that was mutually acceptable and did not involve a significant impact on their balance-sheets, considering the deal size. Their inability to read the minds of the regulators, however, is puzzling given the amount of money they must have paid their advisors for this transaction. They should have had a Plan B too, knowing that their proposed structure was so complex.

Some useful links:

MTN’s announcement to the Johannesburg Stock Exchange.

The South African Treasury’s Press Release.

Bharti Airtel’s announcement to the Bombay Stock Exchange.

The story on Indiabusinessview.com when the Bharti-MTN deal was first announced.

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