India's Bharti, MTN restart merger talks

MTN and India’s Bharti Airtel have revived merger talks to create a $61-billion telecoms giant spanning Africa, Asia and the Middle East a year after a previous deal foundered on the issue of who would control the combined entity.

Bharti and MTN said under an initial deal worth more than $23-billion Bharti would pay in cash and shares for 49% of MTN while MTN pays cash and stock for an effective 36% stake in the Indian firm.

A tie-up would combine India’s biggest cellphone operator with MTN, which operates across 21 markets in Africa and the Middle East, including countries with high growth potential such as Iran, Afghanistan and Sudan.

“The broader strategic objective would be to achieve a full merger of MTN and Bharti as soon as is practicable to create a leading emerging-markets telecom operator, which today would have combined revenue of over $20-billion and a customer base of over 200-million,” the companies said in separate statements.

If the deal goes ahead it would be the world’s biggest non-pharmaceutical transaction so far this year, according to Thomson Reuters data. It would also be India’s largest cross-border deal, almost twice the size of Tata Steel’s near $13-billion acquisition of Britain’s Corus in 2006.

However, some analysts said there was still doubt as to whether a deal would be done. Bharti and MTN said the talks are at an early stage and have set an exclusivity deadline of July 31.

“There is a long road to travel for the deal to actually go through,” Jan Meintjes, a telecoms analyst at Cape Town-based Gryphon Asset Management, said.

“I think there are serious issues in terms of the spheres of influence of the two companies and their management.
Obviously this new structure they are looking at addresses some of that, whether it addresses all of it I’m not sure.”

Top-10 player
A combined entity would be one of the top 10 global industry players based on subscriber numbers. Both have about 100-million subscribers.

Previous merger talks collapsed when the South African firm proposed a new structure that would have seen Bharti become an MTN unit.

MTN also held talks with Bharti rival Reliance Communications last year, but they failed too.

Sanjay Chawla, a telecoms analyst at Anand Rathi Securities, said that based on Friday’s closing share price the deal gave Bharti an enterprise value of 11 times EBITDA, while MTN was valued at 5,5 times.

“Compared to last year the deal structure looks reasonable and, to that effect, the completion risk is low,” he said.

“Plus [MTN] is a free cash-flow positive, dividend-paying firm. Therefore, it’s a cheaper asset and looks to be a pretty good deal for Bharti,” he added.

Some Indian analysts said the firms would not have embarked on new talks unless control issues had been settled.

“I doubt if the merger plan by the two firms that went awry last year will come back to haunt them. One wouldn’t go back a second time unless one is sure,” said Rajesh Jain, chief executive at Mumbai-based Pranav Securities.

Bharti said the deal would dilute EPS in the first year.

Under the initial stake-swapping deal, MTN would take a 25% interest in Bharti for $2,9-billion plus new MTN shares equal to about 25% of its existing shares. MTN shareholders would take another 11% of Bharti.

Bharti would buy about 36% of existing MTN shares at R86 each, plus half a newly issued Bharti global depositary receipt, to be listed in Johannesburg, for each MTN share.

That and the shares MTN issues for its stake in Bharti would take the Indian firm’s holding to 49% of MTN’s enlarged capital. Bharti would be able to fully consolidate MTN’s accounts, and MTN would have representation on the Bharti board.

South-east Asia’s top telephone firm, SingTel, which owns about 31% of Bharti, would remain a strategic partner and major shareholder in Bharti, a spokesperson said.

Bharti said it was being advised by Standard Chartered and its affiliate, First Africa SA (Pty) Ltd.

Bank of America Merrill Lynch and Deutsche Bank are financial advisers to MTN.—Reuters

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