Bharti, MTN renew talks for $23-bn swap deal

Written by Corporate Bureau | New Delhi | Updated: May 26 2009, 07:53am hrs
The countrys largest telecom operator, Bharti Airtel, has reopened discussions to acquire a 49% stake in South Africas MTN for over $23 billion in a cash-cum-stock swap, after a year-long hiatus following the breakdown of talks between the two over the combined entitys controlling structure. In the latest round, for which the two sides have entered into exclusive negotiations until July 31, MTN and its shareholders would get 36% stake in Bharti.

In a departure from last years strategy of direct acquisition and merger of MTN, this time around Bharti is looking at a merger only at a later stage. The broader strategic objective would be to achieve a full merger of MTN and Bharti as soon as it is practicable, to create a leading emerging market telecom operator, a Bharti statement said.

If the deal materialises, the combined entity would have 200 million userswith both partners contributing an equal 100 million eachcreating the worlds third-largest telecom company in terms of subscriber base after Vodafone Plc and China Mobile. In the last quarter, Bhartis subscriber base increased 13%, while MTNs swelled by 8%.

Bhartis share price pared early gains to close down 5.4% on news of the resumption of talks. Analysts said the companys earnings would come under pressure should the deal go though. In contrast, MTNs shares were up 8.78% on the JSE at 8 pm IST.

Revenues of the combined entity would be around $20 billion. Bharti Airtel recorded revenues of Rs 37,000 crore ($7.5 billion) for the year ended March 31, 2009. The combination would also have a market capitalisation of over $63 billion: Bhartis $34 billion and MTNs $29 billion. The deal would also be Indias biggest outbound M&A transaction, topping Tata Steels $13-billion acquisition of Corus in 2007.

Bharti Enterprises CMD Sunil Bharti Mittal said, Both companies would stand to gain significant benefits from sharing each others best practices in addition to savings emanating from enhanced scale. We see real power in the combination and we will work hard to unleash it for all our shareholders. This opportunity also represents a first of its kind in developing an Indian-African initiative that would serve as a shining example of South-South cooperation.

For his part, MTN CEO Phuthuma Nhleko said, The rationale for this potential transaction between MTN and Bharti is highly compelling. It addresses our strategic imperative of becoming one of the pre-eminent emerging market telecommunications companies with leading positions in three of the fastest growing wireless markets globallyIndia, Africa and the Middle East, with no overlapping footprint.

We are excited at the prospect of teaming up with Bharti, Indias number one wireless operator and one of the most strongly capitalised players amongst its emerging market peer group. This would create a highly visible commercial partnership between South Africa and India, Nhleko added.

The potential deal would increase Bharti Airtels footprint to over 21 countries spanning South Africa and the Middle East, where the South African telco currently operates services. At the moment, Bharti has an overseas presence in only three small countries: Sri Lanka, the Seychelles and the Channel Islands.

Standard Chartered Bank and affiliate First Africa are financial advisers to the discussions, while Bhartis legal advisors are AZB & Partners and Bowman Gilfillan.

Bharti has long been scouting for overseas acquisition in emerging markets to replicate the low-cost Indian model and last year its talks with MTN collapsed at the final stages after the South African company reneged on the earlier agreement and wanted Bharti to become its subsidiary.

The countrys second-largest mobile operator, Anil Dhirubhai Ambani Groups flagship Reliance Communications, subsequently entered into negotiations with MTN. However, talks again collapsed as Mukeah Ambani-led Reliance Industries Ltd cited first right of refusal should the younger sibling dilute his majority equity in the company.

Following a deal, MTN would continue to be listed on the JSE and would be the primary vehicle for both Bharti and MTN to pursue further expansion across Africa and the Middle East, while Bharti would spearhead expansion in India and Asia.