India’s Bharti Airtel Group has revived merger talks with MTN to acquire a 49% stake in the South Africa’s largest telephone company. MTN is the dominant operator in several countries across Africa while Bharti is largely an Indian operator. It will be the third largest deal so far in 2009 and if pharma is excluded, it will be the largest deal so far globally. The acquisition aims to create entity stretching from Cape of Good Hope across the African continent, West Asia and the Indian subcontinent reaching out to over 200 million subscribers.
The proposed $29 billion acquisition is the third largest M&A deal after pharma biggie Pfizer acquired Wyeth in January for nearly $64 billion and Merck’s acquisition of Schering-Plough for nearly $46 billion, also in the pharma space announced in March this year. Bharti’s proposed acquisition of 49% stake in MTN may become the largest cross border acquisition by a domestic company after the $12.7 billion Tata-Corus deal.
The potential deal would be structured as follows:
▪ MTN would acquire approximately a 25% post-transaction economic interest in Bharti for an effective consideration of approximately USD 2.9 billion in cash and newly issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.
▪ Bharti would acquire approximately 36% of the currently issued share capital of MTN from MTN shareholders for a consideration of ZAR 86.00 in cash and 0.5 newly issued Bharti shares in the form of Global Depository Receipts (GDR’s) for every MTN share acquired which, in combination with MTN shares issued in part settlement of MTN’s acquisition of approximately a 25% post-transaction economic interest in Bharti, would take Bharti’s stake to 49% of the enlarged capital of MTN. Each GDR would be equivalent to one share in Bharti and would be listed on the securities exchange operated by JSE Limited.
▪ Bharti would have substantial participatory and governance rights in MTN enabling it to fully consolidate the accounts of MTN
▪ MTN’s economic interest in Bharti would be equity
The potential transaction, when completed, would be expected to value for Bharti shareholders due to, among others, synergistic benefits and further diversification of Bharti income streams into the fast growing and relatively under-penetrated African and Middle Eastern markets. Just over a third of India’s 1.1 billion population have access to a cell phone, while MTN operates in virtually untapped markets such as Afghanistan, Sudan, as well as in Africa, where some analysts believe users could almost double to 700 million by 2013. The merger will lead to a bigger exposure for both companies. With the current economic recession affecting most of the companies, this increased exposure to the international market would definitely help them to boost their sales, pushing the combined revenue further. India and Africa are two of the fastest growing telecommunications markets worldwide and this merger will ensure that both companies have easier access to these markets. The deal will also result in Bharti Airtel and MTN having better power and access to innovative technology. Furthermore, this move will also enhance the existing relations between South Africa and India. Indian Premier League (IPL) did its bit to improve the ties, now it is Airtel’s turn.
Given all the benefits that the deal would have, the coming days would be very crucial. Last time the talks between the two corporate giants had come to a standstill as Bharti Airtel had refused to become a subsidiary of MTN. Though this year, Bharti is in a stronger position and MTN will likely have to step down from its previous demands.
The billion dollar deal still faces some hurdles before it is shown the green signal. At the announcement of the renewed 2009 talks, Bharti’s stocks dropped 6%, whilst conversely MTN’s lifted by 9%- a factor which may worry Bharti’s shareholders. Also, Telecom Watchdog, a Delhi based NGO has challenged the deal. It states that under India’s 2005 New Telecom Policy, foreign ownership and investments in telecommunications interests are capped at 74%, and should the merger be successful, Bharti will breach India’s foreign ownership rules.
The coming days would either see the largest non-pharmaceutical transaction to occur in 2009 or should Telecom Watchdog succeed, just a failed merger. The deal if passed, should lead to a lower call rate and expansion of base by Bharti Airtel in India. Agreed that the connectivity of Airtel is the best, but the shooting call rates is leading to more market share being occupied by its main rival, the Vodafone. Also the ZooZoo commercials are doing wonders for Vodafone. Bharti should come up with some innovative style of advertisement rather than every time showing all the big-wigs of Bollywood in their commercials. Also they should reach out more to the youth who comprise the majority of the Indian population. If adhered to these two vital strategies, the day is not far when Bharti would be the one of the leading telephone service providers in the entire world.
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