MTN and Bharti Airtel are talking again – almost exactly a year after discussions initially broke down – with a view to creating a single, $20-billion emerging market telecommunications operator serving 200-million customers.
The two companies are exploring a potential transaction whereby MTN and its shareholders would acquire, pursuant to a scheme of arrangement, an approximate 36% aconomic interest in Bharti, of which 25% would be held by MTN with the remainder held directly by MTN shareholders. At the same time, Bharti would acquire an approximate 49% shareholding in MTN.
Bharti and MTN have agreed to discuss the potential transaction exclusively with one another until 31 July 2009.
The potential transaction between Bharti and MTN would create a leading telecommunication service provider group aligning Bharti's Indian business with MTN's African and Middle Eastern operations.
The potential transaction would also represent a significant development in South-South cooperation between India and South Africa.
Phuthuma Nhleko, CEO of MTN, comments: "The rationale for this potential transaction between MTN and Bharti is highly compelling. It addresses our strategic imperative of becoming one of the pre-eminent emerging market telecommunications companies with leading positions in three of the fastest-growing wireless markets globally – India, Africa and the Middle East, with no overlapping footprint.
"We are excited at the prospect of teaming up with Bharti, India's number one wireless operator and one of the most strongly capitalised players among its emerging market peer group. This would create a highly visible commercial partnership between South Africa and India."
The discussions contemplate that the potential transaction, which would be achieved through a scheme of arrangement, would include the following principal elements:
* MTN would acquire approximately a 25% post-transaction economic interest in Bharti for an effective consideration of approximately $2,9-billion in cash and newly-issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.
* Bharti would acquire approximately 36% of the currently issued share capital of MTN from MTN shareholders for a consideration of R86.00 in cash and 0.5 newly-issued Bharti shares in the form of Global Depository Receipts ("GDRs") for every MTN share acquired which, in combination with MTN shares issued in part settlement of MTN`s acquisition of approximately a 25% post-transaction economic interest in Bharti, would take Bharti`s stake to 49% of the enlarged capital of MTN. Each GDR would be equivalent to one share in Bharti and would be listed on the JSE securities exchange;
* Bharti would have substantial participatory and governance rights in MTN, enabling it to fully consolidate the accounts of MTN; and
* MTN's economic interest in Bharti would be equity accounted and would have appropriate representation on the Bharti Board.
The potential transaction, when completed, would be expected to create value for MTN shareholders due to, among others, synergistic benefits and a further diversification of MTN's income streams into the fast growing and relatively under-penetrated Indian market.
The potential transaction is also expected to create value for Bharti shareholders, including going forward MTN and MTN shareholders due to, among others, synergistic benefits and further diversification of Bharti income streams into the fast growing and relatively under-penetrated African and Middle Eastern markets.
MTN would continue to be listed on the JSE securities exchange operated by JSE and would be the primary vehicle for both Bharti and MTN to pursue further expansion across Africa and the Middle East while Bharti would be the primary vehicle for both Bharti and MTN to pursue further expansion in India and Asia.
The implementation of the potential transaction would not result in any job losses in South Africa, and MTN remains committed to implementing its proposed BEE deal. MTN would also have certain rights to increase its economic interest in Bharti in the future, with the broader strategic objective being to achieve a full merger of MTN and Bharti as soon as it is practicable. This would create a leading emerging market telecom operator which today would have combined revenue of over $20-billion and a combined customer base of over 200-million.
Analysts say both companies need to think through the positions in this round of talks.
“I think the important thing is that this time there is a clear definition of what MTN and Bharti are looking for,” says Frost & Sullivan senior ICT industry analyst Lindsey Mc Donald. “Last time, Bharti wanted to buy MTN, then MTN turned around and wanted to buy Bharti. What eventually led to the breakdown was that the management of MTN didn’t want to give up their ability to steer the company in the direction they think best.”
The transaction proposed today, however, seems to offer clearer benefits to both participants.
“It’s a partnership,” Mc Donald explains. “Basically what will happen is that both companies will get exposure to new revenues from areas they are not already in, without having to go there and establish new operations themselves.”
She says that, given the current economic climate, it would be difficult for MTN to launch its own operations in an entirely new market.
“MTN is trying to increase its exposure to new revenue streams without taking the risk of having to start operations in a new market,” she says. “It’s always difficult to go into a new country, install new infrastructure and come to grips with a new group of customers and a new culture. But the economic conditions are such that going into a new market now would be even more risky.”
MTN has already given a hint of its new approach this year through its partnership with Neotel.
“The company has made it clear that it is looking to ensure it maintains margins by taking an approach to the market that is more cautious than the MTN we might have known a few years ago,” Mc Donald says.
She believes that the two operators need to concentrate on what they have in common. Bharti is the market leader in India and MTN is a market leader in Africa.
“The good thing about this is that this partnership would see the two companies co-operating with each other,” she adds. “As there is no overlap in footprint, their operations would be complimentary.”