Bharti-MTN merger talks collapse again

Indian telco blames SouthAfrica for latest breakdown; MTN shares slide

Talks between Bharti Airtel and MTN Group to create the world’s third-largest mobile operator collapsed for the second time in just over a year yesterday.

Singapore telco SingTel has a stake of about 30.4 per cent in Bharti, India’s largest mobile operator. Bharti blamed the South African government for the latest breakdown in a deal that faced close scrutiny from regulators and politicians.

South Africa was eager to retain MTN’s national character and had approached the Indian authorities to consider a dual-listed entity, a structure Indian law does not allow.

‘We hope the South African government will review its position in the future and allow both companies an opportunity to re-engage,’ Bharti said, adding that it would continue to explore international expansion opportunities.

Shares in MTN, Africa’s biggest mobile operator by subscribers with a market value of about US$31 billion, fell as much as 3.5 per cent to 119 rand after the news.

Ahead of the news, shares in Bharti closed 0.1 per cent lower in a market that rose 1.6 per cent.

Bharti and MTN revived talks in May, a year after previous negotiations broke down over who would control the resulting emerging-markets giant with more than 200 million customers across India, Africa and the Middle East.

Under the initial terms outlined in May, MTN and its shareholders would take a 36 per cent economic interest in Bharti, which would end up with 49 per cent of MTN.

The deal would have given both exposure to new markets ripe for growth, while a full merger, the eventual aim of the talks, would yield cost savings, allow for technology sharing, and provide financial muscle for more expansion, analysts say.

A combined entity would have been the third-biggest mobile operator based on subscribers, behind China Mobile and Vodafone.

The exclusive talks over the deal were initially due to end on July 31 but were extended twice earlier.

Bharti had increased the cash component of its offer for a 49 per cent stake in MTN to US$10 billion from a proposed US$7.6 billion, two people familiar with the matter had said.

On top of that, the Indian firm was paying US$4 billion in stock for a total package of US$14 billion, 7 per cent more than an estimated US$13 billion proposed initially.

India’s capital markets regulator last week altered the country’s takeover rules, requiring a company that acquired 15 per cent of an Indian firm through American depositary receipts or Global Depositary Receipts (GDRs) with voting rights to make a mandatory offer for a further 20 per cent.

Under the new rules, MTN might be required to make an offer for an additional 20 per cent stake in Bharti, if it is issued GDRs with voting rights.

Standard Chartered and Barclays were advising Bharti Airtel, while Bank of America Merrill Lynch and Deutsche Bank were advising MTN. — Reuters

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The bid is consistent with the company’s strategy to bring attractive content to SingTel customers for their entertainment.

SingTel’s billion-dollar Bharti dilemma

TO top up or not to top up, that is the question. And for Singapore Telecommunications, that is the billion-dollar question it soon has to answer as Bharti Airtel and South Africa’s MTN Group enter the home stretch of their proposed US$24 billion union.

The exclusive negotiation between Bharti and MTN is scheduled to end on Sept 30, although market watchers expect the deadline to be pushed back for a third time due to unresolved regulatory challenges. A particular moot point is the South African government’s insistence on retaining MTN’s listing in Johannesburg, a condition which contravenes India’s ban on dual-listing among local companies.

The shifting timeline does give SingTel more time to ponder its next move, but the eventuality it faces remains unchanged. If the deal to create the world’s third-largest wireless operator comes through, its 30.44 per cent stake in Bharti will definitely be reduced.

Bharti accounted for 24 per cent of SingTel’s underlying post-tax profits in its first quarter and it has consistently been the firm’s best-performing regional associate.

Estimates ranging from reduced stakes of 19.5 per cent to 25.6 per cent in Bharti have been tossed out by various market analysts. Some industry watchers also believe SingTel could sink in as much as US$3 billion to reclaim its lost ground in Bharti, though the operator has repeatedly declined comment on the issue.

The extent of the Bharti dilution is anyone’s guess given the complex and closely-guarded nature of the cash plus stock-swap arrangement between Bharti and MTN. While the finalised terms for the mega-merger may differ, a significant reduction in Bharti shareholding is definitely not in SingTel’s best interest.

Currently, SingTel uses the equity method to account for Bharti’s earnings contribution. This means it takes a proportionate share of the Indian’s operator’s earnings. This is possible because of its 30.44 per cent stake in Bharti, a number which falls within the 20 to 50 per cent range needed to give an investor ‘significant influence’ on its investee as defined by most accounting principles.

If SingTel’s stake falls below 20 per cent, it may have to re-look its accounting policy for Bharti. SingTel’s chief financial officer Jean Low did previously say that ’20 per cent is not the magic number’, and some local companies do equity account for companies in which they have less than a 20 per cent stake. To do so, investors will need to demonstrate that they have a significant influence. In SingTel’s case, its influence on Bharti will certainly be diminished against MTN’s larger stake.

To be fair, SingTel’s final decision on Bharti will hinge not on accounting nuances but whether a top-up will boost is bottom line in the long run. Using this yardstick, reclaiming its lost Bharti stake becomes an even more compelling proposition.

The Bharti-MTN merger presents SingTel with a rare opportunity to give its overseas sales a major boost. The operator, which has been starved of acquisitions in the past two years, will benefit from a combined operator with more than US$20 billion in sales and over 200 million subscribers across Asia, the Middle East and Africa.

Given SingTel’s track record of being a shrewd dealmaker, it will be seeking to capitalise fully on this opportunity. The exposure to new high-growth markets will make up for lacklustre performances in Bangladesh and Pakistan, while SingTel’s core bases in Singapore and Australia continue to generate much-needed cash flow. Furthermore, SingTel’s strong credit ratings means it should have no shortage of lenders to fund the top-up.

Opportunity rarely knocks twice, and this is already the second time MTN and Bharti have renewed their courtship. For SingTel, this could be an opportunity that is just too good to miss.