News Analysis: Can Mittal Talk His Way Through In MTN Takeover Game?
Here’s an update on what could turn out to be India’s biggest overseas corporate takeover. While Bharti Airtel and MTN have confirmed that they are in talks for a possible M&A deal, there are various new shades to the proposed deal. VC Circle’s round up on the developing story.
Non Compete Clause?
One of this can involve a ‘non-compete’ clause which would prevent Bharti to enter the 21 odd markets, where MTN has operations under its own brand. This makes sense as after the deal, MTN would be a part of Bharti and why would Bharti like to operate two brands in one market. However, on the flip side it would mean giving up on a strategy to expand under its own brand in the African market. This can become a cost element in the future as and when Bharti tries to make Airtel its global brand.
Management?
Another aspect is that of control. Some reports say Bharti is keen that the existing management of MTN continues in its present role. This is sometimes essential in a large corporate deal specially if its in a different market altogether.
However, there are some other versions to this side of the picture, suggesting that MTN has reportedly conveyed to Bharti that the top management of MTN including CEO and group president, Phuthuma Nhleko should be retained even in the new management set-up.
Another view is that Bharti is open to retain political figure, Cyril Ramaphosa as co-chairman post acquisition. This could be critical given the regulatory issues in getting all the green signal for the deal.
Incidentally, MTN management controls over 13 per cent equity stake in the company. While some news reports have said that they might be looking at unlocking the value of equity, it is unlikely they would sell off everything in case the deal culminates.
The most likely scenario could be where Sunil Mittal takes over as the chairman while keeping MTN co-chairman and CEO. In any case the MTN CEO is up for retirement in two years (June 2010) and he’s not keen on continuing further. This may imply a joint MD sort of role for Manoj Kohli if at all in the future.
Cash Plus Equity Swap?
The other aspect is the deal structure with some reports talking about a cash plus stock deal where Bharti may partly pay MTN with an equity stake in Bharti Airtel. Bharti Airtel has a market cap of around $39 billion. A 10 per cent stake dilution could yield $3.5-4 billion worth of shares (given that such a dilution could also mean a rerating of the stock).
The earlier media reports have indicated that debt worth $12 billion odd have already been informally negotiated with a clutch of international I-banks such as Goldman Sachs and StanChart. Given that a deal for 51 per cent would involve about $18-20 billion in value, the balance could come from a mix of equity swap and fresh capital raising by Bharti.
Will SingTel join the party?
In the end it could be more than a simple acquisition deal between Bharti and MTN. This could be due to the significant presence of Singapore’s SingTel(owning roughly one third of Bharti Airtel) in the Indian telecom firm. This could mean a joint deal where Bharti and SingTel jointly acquire MTN. This could lead to a creation of one mega regional telecom giant with operations spanning across Africa, Asia and Australia, almost the entire world barring US and Europe.
Citigroup has already sent an indicative message in one of its reports: “Don’t forget SingTel. Given the size of any potential acquisition, we see a reasonable probability that SingTel gets directly involved with Bharti as a co-buyer as well.”
MTN a nutty shareholding structure!
Acquiring MTN could be a complex deal given its shareholding structure. Alpine Trust, which is controlled by two shareholders that have pooled their shares in the trust, is MTN’s largest shareholder with 23 per cent. One of Alpine Trust’s shareholders is Newshelf664, a company floated by MTN staff while the other is M1, controlled by the Makati family.
Another major shareholder is PIC, a South African government-owned pension fund, which has 13.5 per cent. The rest of the shareholding is widely dispersed.
For the deal to go through Bharti may have to woo both Alpine Trust as well as PIC to garner more than 35 per cent stake. Under the South African law, the acquirer will have to make a mandatory open offer once its holding reaches 35%.
Other Suitors?
Will it be a cakewalk for Bharti? While some reports have suggested that it may face counter bids as on date there is no clear picture on the same.
Vodafone and Reliance Comm have stated that they are not in the race. For instance, Vodafone spokesperson has said that is committed to its exposure in Vodacom, in which Vodafone holds a 50 per cent stake. Vodacom is also a pan African telecom firm which is an equal equity JV between Vodafone and South Africa’s Telkom.
Vodafone had earlier made several unsuccessful attempts to buy out MTN after the South African government blocked it from purchasing a controlling stake in Vodacom. But the talks were called off as discussions between Vodafone and MTN failed to make headway.
Anil Ambani led RCOM, which is the prime competitor for Bharti in India has indicated it is not interested in MTN given high valuations.
This leaves the Chinese firms and Mid-East telecom firm Orascom as potential competitors. However, none have given any official confirmations of their interest in MTN.
Some I-bankers however, expected Bharti to face stiff competition from a Chinese rival. This is borne by the fact that China’s government-controlled entities have invested and lent billions of dollars to African countries in recent years. Representatives from China Mobile and China Telecom, have said they have not heard of any plans for a bid.
Incidentally, MTN has had many suitors in the past. Even moved ahead in closing the deal but somehow never got to finalise something for some reason or the other. For instance, on October 20, 2005, MTN said it was in talks which “if successfully concluded, may have a material effect” on its share price. It never disclosed the buyer. As a result, MTN shares gained 23 per cent during October-November 2005.
In October last year, China’s largest cellular operator, state-owned China Mobile, was also learnt to be “close to striking a deal” with MTN. Nothing materialised. In November 2006, China Telecom was reported to be in talks to buy MTN. “We wish to deny the news report of China Telecom buying MTN,” the Chinese company said then. But MTN shares rose 6 per cent.
More recently, MTN’s share price soared in March this year on reports that Vodafone could bid for a part of the company. The CEO was quoted by the media as saying there was “nothing of such a nature that would constitute a serious approach or a serious offer….” But he later confirmed that casual discussions had been held with Vodafone, among others.
If we reconsider the possible suitors, Orascom and China Mobile could be one of them. However, it does not have a great history in such deals in the past. Besides its previous talks with MTN heading nowhere it also other unsuccessful history in the region. It had came close to another big deal in 2006, when it agreed to buy Millicom. But the Chinese company backed out at the last minute, leaving Millicom investors with a sharply lower stock price. It has in the past had said that it was looking at new markets to expand.
On the other hand, Orascom is present in Africa and Asia and is amongst the largest telcos in the region. While other large western telcom firms are not being considered as those in the race, they may also join the bidding game in the next few weeks.
