Bharti makes another play for MTN

Leading Indian telecommunications company Bharti Airtel yesterday announced that it is once again exploring the potential of a merger with South Africa's MTN Group; almost exactly one year after Bharti aborted takeover talks for MTN. Bharti and MTN have signed an exclusivity agreement that will last until July 31.

"We see real power in the combination and we will work hard to unleash it for all our shareholders," Sunil Bharti Mittal, chairman and managing director of Bharti, said in a written statement.

The deal structure currently envisaged is a shareholding swap, which will see Bharti acquire a 49% stake in MTN, while MTN and its shareholders will acquire a 36% economic interest in Bharti, which will be split with 25% held by MTN and the remainder held directly by MTN shareholders. Bharti is being advised by Standard Chartered and MTN is being advised by Deutsche Securities and Bank of America-Merrill Lynch.

The effective consideration for the 25% stake that MTN will acquire in Bharti is $2.9 billion in cash and newly issued MTN shares. The new shares will account for approximately 25% of MTN's existing issued share capital.

Bharti will acquire approximately 36% of MTN from its shareholders at a cost of R86.00 ($10.45) in cash and 0.5 new Bharti shares in the form of global depositary receipts (GDRs) for every MTN share. Together with the shares that MTN will issue to Bharti in exchange for the 25% stake it is acquiring in the Indian telecom operator this will take Bharti's shareholding to 49% of MTN's enlarged share capital. Each GDR is equal to one common Bharti share. The GDRs will be listed on the Johannesburg Stock Exchange.

Bharti will exercise management control over MTN and will consolidate MTN's financials even though MTN will be a 49%-owned subsidiary. MTN will be a financial investor in Bharti and will have representation on Bharti's board of directors.

The deal brings together Bharti's India business with MTN's African and Middle Eastern operations, creating a combined entity with revenues in excess of $20 billion and a customer base of 200 million. "The broader strategic objective would be to achieve a full merger of MTN and Bharti as soon as it is practicable," said Bharti in a written statement.

Bharti will be the vehicle to pursue opportunities in India and Asia, while MTN will be the conduit for expansion in Africa and the Middle East, said the parties.

If the deal goes through, it will demonstrate the virtues of patience and the importance of timing for M&A deals. Bharti's takeover of Johannesburg-headquartered MTN was first mooted in 2008. At the time, MTN had an estimated enterprise value of between $40 billion and $50 billion. Talks between the two parties fell apart shortly after Reliance Communications, owned by Indian business tycoon Anil Ambani, entered the fray with a competing bid. But Ambani was forced to walk away from the negotiating table when his brother, Mukesh, threatened to scupper the deal citing legal issues.

The new deal structure will see Bharti shell out much less cash for a similar end game. Bharti told media the current deal value is around $23 billion.

Singapore Telecommunications, which has a strategic stake of around 30% in Bharti, backed the Indian firm's plans to pursue MTN in 2008 and was said to be willing to co-invest to effect the takeover at that time. It is not clear what SingTel's stand on the current deal is, but specialists have suggested that it may not play as active a role this time round. Goldman Sachs is representing SingTel.