"What went wrong with Bharti’s S African trip"

Joji Thomas Philip & Javed Sayed NEW DELHI


IT WAS supposed to be a done deal. The Bharti Airtel board was to meet on May 25 in London to ratify the merger of MTN with itself, thereby creating the world’s sixth largest telecom company. It had been decided that a formal announcement would be jointly made on May 27 (Tuesday) as Monday is a bank holiday in London. The champagne was on the ice.

But the script went awry on May 21(last Wednesday) when instead of approving the merger, the MTN board came back with a counter-proposal, which would have resulted in the Indian company becoming a subsidiary of MTN. The South African company’s board had also demanded that its shareholders be given the majority shares of Bharti Airtel held by the Bharti family and SingTel in exchange for a controlling stake in MTN. These terms were unacceptable to Bharti and while negotiations continued till the early hours of Saturday, the deal could not be salvaged. So, what went wrong? Why did the MTN board reject a proposal that its management had earlier agreed and when a term sheet had already been signed? While there is no official confirmation, a source close to the discussion says that it was largely the reluctance of MTN chairman Cyril Ramaphosa to give his approval to the merger, which resulted in the board rejecting the proposal.

Besides being a successful businessman, Mr Ramaphosa is a prominent South African political figure. There has been speculation that he may emerge as a compromise presidential candidate when president Thabo Mbeki’s terms ends in 2009. While Jacob Zuma, South Africa’s most controversial politician, is slated to succeed Mr Mbeki, many political watchers believe Mr Ramaphosa may emerge as a consensus candidate, given the reservations about Mr Zuma in various circles.

“Mr Ramaphosa was uncomfortable with a merger that would have resulted in MTN getting folded in Bharti. He does not mind if the ownership of MTN changes but for political reasons, he wants the company to continue to exist,” said the source. Another factor that may have gone against Bharti is the emergence of other suitors including its bitter local rival Reliance Communications. Even as Bharti was turning down MTN’s offer to become its subsidiary, MTN’s financial advisors Merrill Lynch and Deutsche Bank are learnt to have approached RCOM who expressed its interests in discussions. This may have given MTN the impression that it has options apart from Bharti.

RCOM apart, it has been reported that Germany’s Deutsche Telekom, Russia’s VimpelCom, China Mobile and the Emirates Telecommunications Corporation (known as Etisalat) were also charting plans for a possible bid, a move that could have raised the valuations of the company significantly. A bidding war can push MTN’s valuations to close to R180-R200 per share, which raises its market cap to $50 billion. This is a more lucrative option since discussions between Bharti and MTN had begun in March where a reference price of around 160 rand per share (the then market price of MTN was less than 130 rand) was agreed upon. In addition, there are other factors that may have contributed to the collapse of the talks.

According to industry sources, a Bharti-MTN merger would have faced a major regulatory hurdles on the FDI front. “The merger would have meant that foreign holding in Bharti Airtel would have reached around 85%. While Bharti executives had told MTN that they would be able to get the FDI sectoral cap waived, the feedback that the MTN directors were independently receiving was that it would be difficult for the sectoral cap to be relaxed,” said an industry source. Bharti, on its part, maintains that it had enough leeway to give MTN shareholders equity in Bharti within the 74% limit.

Another factor that is being cited is that important shareholders such as SingTel and Temasek were not happy with the arrangement. But a source close to the discussion says the SingTel board was scheduled to discuss and approve the merger before the MTN board meeting threw the spanner in the works.

So far, MTN has not spoken about why discussions fell through. While it has said it will make a statement on Monday, industry sources say Bharti issued a statement on Saturday as it wanted to make its position public. Whatever may be the reason, the fact remains that collapse of the talks must be hard news for the Bharti management to accept.