MTN-Bharti Airtel tie-up: yay or nay?

India's PM: supports Bharti Airtel-MTN tie-up

More than once I have warmly recommended articles written by Matthew Reed, the editor of the Informa Telecoms & Media Mobile Middle East & Africa Intelligence Centre. The latest interesting discussion from Matt, with whom I had the pleasure of working towards the end of my own stint as an Informa person, concerns confusion surrounding major telecoms M&A deals across the MEA region which he covers.

Anyone who watches these markets - or indeed who reads this blog on a regular basis - will not be surprised to learn which two potentially huge and seemingly stalled deals are the focus of Matt's article:

• the prospective sale of a stake in MEA mobile group Zain, or perhaps just the sale of its African operations
  
• the long-mooted cash and share-swap tie-up between giant Indian cellco Bharti Airtel and South Africa's multinational telecoms group MTN

I only propose to spend time on the latter here today.

Matt Reed notes that talks between Bharti Airtel and MTN, which began in May and have been extended twice, most recently to a deadline of end-September, seem to be heading toward the wire once again without resolution. Matt's article is dated 22nd September, so we are now four days closer to that wire.

So what's holding up the mooted mega-merger? A significant problem, reports Mary Lennighan, writing for Total Telecom yesterday, is the effect of a recent tightening of India's takeover rules. This move apparently means that MTN could be forced to make an open offer for an additional 20% of Bharti Airtel, which in turn would create financial and regulatory problems. The first of these is the business of finding a large quantity of cash to fund the open offer - Lennighan reports esitmates of up to USD 9.35 billion.

Secondly, the proposed deal would put Bharti Airtel well over India's 74% foreign direct investment cap - MTN would hold 25% of the Indian MNO directly, and its shareholders would have an additional 11%. The extra 20% stake would give the South African company a 56% chunk of its new partner. SingTel already hold 30.4% of Bharti Airtel - hence the FDI cap problem.

This is not the only potential legal problem faced by the deal makers. The other, writes Lennighan, concerns the insistence of the South African Government that the merged entity should be listed on both the Johannesburg and Bombay stock exchanges. Indian law prohibits Bharti Airtel from any such dual listing.

These problems may be surmountable, however, at least if the deal is supported at the highest levels, which does seem to be the case. According to an article in yesterday's Economic Times, Indian Prime Minister Manmohan Singh has admitted to discussing the merger at the G20 summit in Pittsburgh with South African president Jacob Zuma. Singh expressed support for the deal and also stated India's willingness to discuss any outstanding issues.

This looks encouraging for proponents of the deal, but should either party be approaching this marriage with caution? An editorial piece in South Africa's Financial Mail this week suggests that this might be the case for MTN and its many shareholders - the telecoms giant apparently appears in the portfolios of dozens of unit trusts, and many retirement funds have significant stakes, including the Public Investment Corp., which holds an 11.2% stake on behalf of members of Government pension funds. The opinion piece warns that shareholders will have to evaluate the proposals carefully, and ask whether the expected benefits will compensate for the risk. The article commends MTN for an exceptional international growth record, comparing this favourably with Bharti Airtel's more limited career as an international player. The writer also refers to the Indian cellco being part of the wider Bharti conglomerate, with its "different culture." Without saying much about what might go wrong, the Financial Mail opines that "institutional investors should be concerned that the huge value that has been created in MTN - and which may come in the future - is not frittered away by an unwise deal."

Matt Reed, writing about the 2008 failure of these two giant telecoms companies to come together, notes that reportedly, a factor in that failure was South Africa’s worry that control of MTN, which is perceived as a national champion, could pass into foreign hands. This, at least, is something that the Financial Mail does not consider as a legitimate reason for a 2009 deal hitting the rocks. Government should avoid taking decisions based on national pride, ideology or an aspiration to protect or create a national champion, says the editorial piece. "Those would be the wrong reasons, and could lead to poor judgments with bad results. There are no grounds so far for assuming jobs [in South Africa] would be at risk because of an MTN deal with Bharti Airtel."

There may be reasons, then, to believe that this deal will get done reasonably soon. Or will be be discussing deadline extensions throughout the next few months?

MTN-Bharti Airtel tie-up: yay or nay?