"Bharti may buy MTN by paying cash and equity"

ndia's largest telecom company Airtel hinted at plans to forge a merger with Africa's largest telco, MTN.

In a statement, Bharti said that it has not made any bid for MTN nor is it required to make any bid. “The discussions being held are aimed at combining the strengths of the two leading emerging markets players and accordingly veering towards possible structures to achieve this objective,” the company said.

The statement clears some of the confusion over how the deal could be structured. Though the Bharti statement does not say it in so many words, industry observers and M&A experts feel that the deal could be achieved through a merger. People close to the situation said that Bharti is exploring the possibility of buying 100% of MTN through a ‘scheme of arrangement’. Bharti will compensate MTN shareholders in cash as well as stock.

About $20 billion of the total acquisition value (which is $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. Since Bharti is not listed in South Africa, it will have to make a listing in order for the deal to go through.

South African regulations allow foreign companies to list in the Johannesburg stock exchange. This is called a secondary listing of foreign companies. Several companies, including some well-known names like BHP Billiton, Investec Plc, Old Mutual and SABMiller have secondary listings in Johannesburg with the primary listing elsewhere.

Bharti, people with knowledge of the deliberations say, will list on the Jo’burg stock exchange and its shares will be issued to MTN shareholders. It could be a massive issue, the biggest from any Indian company and one of the biggest in the world. Over half of Bharti’s current market capitalisation of about $40 billion will have to be issued to investors for the deal to go through. Whether Bharti will eventually make such a humungous public issue remains to be seen, but company executives are believed to be considering this option.

Once Bharti acquires 100% of MTN, it will be merged with Bharti, with the combined entity being called MTN Airtel. Sunil Bharti Mittal will be the non-executive chairman while Phuthuma Nhleko will be the CEO of the new entity. MTN chairman Cyril Ramaphosa is unlikely to be on the board.

The Bharti-MTN combine will be the world’s sixth largest telco with close to 130 million customers. It will also have access to the world’s fastest-growing mobile markets — Africa, West Asia and South Asia.

Explaining the broad contours of the deal, an industry source, who claimed to be in the know of things said: “Bharti has already got commitments from leading global banks to the tune of $18 billion. So, the company can readily raise up to $20 billion in debt. Bharti will then issue fresh equity of around $25 billion in the form of depository receipts.

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. This formula will see MTN shareholders hold 38% in the combined entity. In effect, the merger will translate into a 100% buyout.”

The Bharti spokesperson refused to comment on this possibility. A statement from MTN said they did not wish to comment further or add to an earlier statement on May 5.

This model will provide Bharti with up to $20 billion in cash (debt plus internal accruals) to buy close to 50% in MTN, while the rest of MTN’s stock would be swapped with Bharti Airtel stock. According to industry sources, this will also enable Bharti to meet pre-conditions put forward by MTN such as the company’s current CEO Phuthuma Nhleko heading the mobile business arm of the combined entity and Bharti awarding three places on its board to the MTN top brass.

Industry sources also said that buying out MTN shareholders such as the Alpine Trust and South African pension fund PIC through a share swap will enable Bharti to comply with South African regulations, which stipulate that a minimum 25% of a local company’s equity and 40-50% 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.)

If this model translates into reality, the final shareholding structure of the Bharti-MTN combine will be as follows — Sunil Mittal with 15%, SingTel about 19% by virtue of its holding in Bharti Airtel, South African shareholders with about 36%, while the rest will be with the public, industry sources added.

It is also learnt that Mr Mittal and the Bharti MD Akhil Gupta are scheduled to meet Lebanon’s Mikati family which holds close to 10% stake in the south African telco, Mr Nhleko and other top management executives in a couple of days to discuss the corporate structure of the combined entity. Industry sources here say that following the meeting, both companies are likely to announce 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.’

Industry sources also add that MTN may have already committed to an ‘exclusivity agreement’ with Bharti. This implies MTN will not disclose the terms of arrangement to any other party. Sources also added that only after the completion of due diligence from both sides would 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.