MTN-Bharti deal - What are the potential obstacles?

MTN Irancell: does the South African group's presence in U.S.-sanctioned countries threaten the mooted merger with Bharti Airtel of India?

By some measure the the most durable story in these parts is playing out in the dramatic form of Zain Africa Speculation Watch the mini-series. I just can't leave it alone.

It is by no means the only show in town, however. Also quite compelling is the merger being considered by Indian cellco Bharti Airtel and pan-African mobile group MTN. However the talks are progressing, it seems that the former party will not find it too challenging to raise the necessary cash. If a recent headline in India's Economic Times is to be believed, several banks are in "a race" to offer part of the USD 4 billion apparently needed to fund the merger. Writing on Monday, Mohit Bhalla believes that JP Morgan, BNP Paribas, HSBC and Barclays are all keen to do business.

According to a Reuters article on Tuesday, however, some financial institutions may find one aspect of the mooted merger to be something of a challenge.

It seems that while a big Q1 jump in subscriber numbers for MTN Irancell (in which MTN holds a 49% stake) is good news for the pan-MEA group, the company's involvement in Iran is "potentially troublesome for U.S. banks eyeing a role in the South African telco's planned USD 20 billion-plus merger."

The Reuters article notes that MTN's annual report says 13% of its 2008 revenues came from Iran, Sudan and Syria, three states where the U.S. Treasury's Office of Foreign Assets Control (OFAC) "sets tough restrictions on U.S. firms, effectively banning them from most direct and indirect dealings due to U.S. sanctions."

While these markets are important for MTN, they can be challenging places to do business. In Iran, for example, some reports have suggested that MTN Irancell's revenues may have been quite badly affected by recent Government action in the wake of the disputed election result and ensuing unrest. A week-old Economic Times article cites unnamed analysts as suggesting that MTN "stood to lose at least a month's revenue in Iran" due to "blockage of mobile network signals in the wake of the ongoing strife there."

This suggestion was rubbished by MTN's group spokeswoman Nozipho January-Bardill according to Reuters. One week ago Ms. January-Bardill stated that the "MTN network is running in Iran and there is nothing wrong with it."

This comment about about MTN's network being unaffected notwithstanding, I do have the sense that to some degree it continues to be difficult for Iranians to communicate with associates within and beyond their country. I can offer one personal anecdote.

A Dubai-based Iranian contact of mine is currently visiting his home country and has advised me that he expects communication to be affected during his stay. He says that I may not be able to connect with his UAE mobile phone and that email communication could be affected if he experiences difficulties with Internet access.

The latter problem could certainly arise, if a recent Wall Street Journal article is to be believed. The WSJ piece contends that Government "infiltration of Iranian online traffic could explain why the government has allowed the Internet to continue to function - and also why it has been running at such slow speeds in the days since the results of the presidential vote spurred unrest." By way of evidence, the article states that "users in the country report the Internet having slowed to less than a tenth of normal speeds", explaining that "deep packet inspection delays the transmission of online data unless it is offset by a huge increase in processing power, according to Internet experts."

According to the Economic Times, MTN has declined to say anything negative about the current situation in Iran. The Indian newspaper also canvassed the views of analysts, whose collective feeling seems to be that MTN is "expected to continue its silent approach." Frost & Sullivan's Lindsey McDonald is quoted as saying that "MTN will want to keep the Government happy since Iran is one of its biggest markets, and they would rather lose market share than be kicked out altogether."

"That's the company's style," agrees Dennis Smit, Managing Director of South African research house BMI-T. "It doesn't get involved in local politics," he said. "That's why it can enter such high-risk countries."

In the sense of these countries being too high-risk for U.S. banks eyeing the MTN-Bharti Airtel merger, opinion seems to be divided.

Tuesday's Reuters article mentions that a U.S. Treasury official had "declined to comment on the MTN-Bharti advisory work by U.S. banks, but said there was some room within OFAC rules for U.S. companies to deal cautiously with situations involving deals with foreign firms that have subsidiaries in the sanctioned areas - as long as they are not facilitating transactions with the sanctioned countries."

"U.S. persons are not necessarily prohibited from dealing with third-country firms that do business in sanctioned countries, although they should approach such dealings carefully," said the official, who was not authorised to speak publicly about OFAC's enforcement of sanctions.

The Reuters article indicates that for investment banks with advisory or underwriting fees at stake, that interpretation has created two schools of thought. The first is a more liberal view of the sanctions, "which appear to have some wiggle-room" with regard to deals that are 'third-country' as opposed to dealing directly with a company whose headquarters are in a sanctioned country. The second view is more conservative and might lead to bankers and lawyers steering clear of a Bharti-MTN type deal "on the premise that facilitating such a transaction toes too close to OFAC, even though the merger indirectly involves the sanctioned areas."

It remains to be seen which view will prevail in this case and to what extent a cautious approach by U.S. banks could negatively affect the chances of the merger going ahead.

In South Africa, where MTN is headquartered, there also seems to be some divergence of views about the desirability of the group linking up with the giant Indian cellco.

One suggestion is that this week's resignation by MTN Finance Director Rob Nisbet may have resulted from his not favouring the proposed tie-up with Bharti Airtel.

A former rival of MTN's, however, seems to be feeling much more positive, according to another recent Economic Times article. Former Vodacom CEO Alan Knott-Craig told the newspaper that "the deal will create a lot of value for the shareholders of both the companies" and that "it is the best time for Bharti to do the deal." According to Knott-Craig, "three years ago, Bharti would not have brought anything to the table [but] that story is now different. The deal will allow Bharti and MTN to learn from each other." A nice endorsement.

The exclusivity agreement currently locking Bharti Airtel and MTN out of discussions with other prospective bedfellows expires at the end of this month. With Zain's African operations possibly on sale (see DTW posts passim) and possibly of interest to either of these two parties, I have to assume that this mooted mega-merger will play out one way or another before too long. Keep watching.

MTN-Bharti deal - What are the potential obstacles?