Bharti Airtel MTN Merger
Sunil Mittal may not be able to sweet-talk this deal through so easily. From an outright acquisition, Bharti Airtel’s MTN gamble is now taking the shades of a merger with cash and stock as major components of the deal. This deal would be the first of its kind for an Indian company which is looking to merge itself with an equal if not a larger foreign entity (steel magnate LN Mittal was adept at this game and his last deal with Arcelor was a similar one). Bharti is believed to be contemplating a South African listing so that it can issue shares or depository receipts of Bharti Airtel (since foreign nationals cannot own shares of Indian listed companies directly) to MTN shareholders in the event of a merger. Bharti Airtel hinted at such a possibility yesterday.
The Merger Matrix
In effect, this would mean a cash plus stock deal to bring together Bharti and MTN. According to a report, around $20 billion of the total acquisition value (which is estimated at $45 billion) will be in cash, which Bharti will raise through a combination of debt and internal accruals. The remaining amount of about $25 billion will be paid in Bharti stock. This would mean Bharti will have to float a GDR or ADR or most likely get listed in South Africa for the deal to go through.
The $25 billion worth of fresh equity can be used for share swap with large MTN shareholders such as the Alpine Trust and South African pension fund PIC. This will result in MTN shareholders holding on to the fresh equity in Bharti Airtel. MTN shareholders may end up holding 38% in the combined entity.
The combined entity will be called MTN Airtel. As indicated by VC Circle earlier, Sunil Bharti Mittal will be the non-executive chairman while Phuthuma Nhleko will be the CEO of the new entity.
Significantly, such a share swap will enable Bharti to comply with South African regulations, which stipulate that a minimum 25 per cent of a local company’s equity and 40-50 per cent management control should be with local Black investors. (The Mikati family and Newshelf combined form the Alpine Trust - The Mikati family of Lebanon owns 10% and Newshelf owns 13% in MTN through the Alpine Trust.)
In this case, the final shareholding structure of the Bharti-MTN combine will be as follows — Sunil Mittal with 15 per cent stake, SingTel about 19 per cent by virtue of its holding in Bharti Airtel, South African shareholders with about 36 per cent, while the rest will be with the public. Such equity holding structures are very common internationally where the actual promoters hold minority stakes
themselves.
The corporate structure is expected to be discussed during the scheduled meeting of Sunil Mittal and the Bharti MD Akhil Gupta with Lebanon’s Mikati family, MTN CEO in a couple of days. This is likely to be followed up with the signing of a non-disclosure agreement, the first step towards giving Bharti access to MTN’s books so that it can begin due diligence. After the completion of due diligence from both sides Bharti make a final offer to MTN shareholders which could be upwards of 175 rand a share. At 175 rand a share, MTN would be valued at around $45 billion.
New Funding Options
A new funding option being explored is tapping on to the financial might of sovereign wealth funds. According to a WSJ report: Bharti Airtel has approached West Asian sovereign wealth funds to finance its possible bid for a majority stake in the South African company. If the merger option is being pursued seriously then this could be just another back-up funding source being planned by the Mittals for the MTN deal. What is surprising is why would Bharti go after West Asian firms, when it already has Singapore’s sovereign wealth fund Temasek among its investors. Temasek which had last year announced a deal to acquire a minority stake in Bharti Airtel also has stakes in its tower arm.
New Suitors
In the meanwhile, a possible counter bid candidate has cropped up. UAE’s Etisalat is also eyeing MTN as part of its expansion plans. Its chairman Mohammed Omran has already said that: “We are always looking for expansion in Africa. We are evaluating MTN, among other companies.” He wants Etisalat to earn at least a quarter of its revenue from Africa within four years. It already serves 51-million users in 16 countries, and has spent $5 billion over four years to launch in Egypt and Saudi Arabia and to buy into a Pakistani operator. In December, it said it would buy 16% of an Indonesian operator.
Side Effects
As a postscript, the deal talk has not just added fuel to the MTN stock price but has also affected the value of the South African currency. Against the dollar, the rand gained as much as 0.6 percent to 7.5674 yesterday
Source : VCCIRCLE
