Deconstructing the Bharti-MTN Deal

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By Vikas Srivastava

Jun. 5 – The proposed merger of Bharti and MTN is likely to make the resulting telecom the world’s third largest mobile operator after China Mobile and Vodafone in terms of number of subscribers.

Negotiations for the merger started in May, 2008 by Bharati. However, the terms and conditions set in the earlier merger proposal by Bharati were not accepted by MTN which later proposed a new structure envisaging Bharati as a subsidiary of MTN and any hopes for a deal were said to be over. However, a new proposal was offered, and Bharti is now looking forward for successful merger and the new deal is being described as a merger of equals.

As per the new proposed deal, Bharti will acquire a 49 percent shareholding in MTN and in return, will allow MTN to acquire economic interests of approximately 36 percent along with its shareholder in Bharti. Out of this 36 percent, the MTN group will only hold 25 percent and the remaining 11 percent will be held directly by the shareholders of MTN.

The deal’s effect
The merger seems to be beneficial for both the companies and will provide Bharti with a better market capturing opportunity, expanding the company’s presence in 21 nations in addition to its presence in Sri Lanka, Seychelles and Channel Island. On the other hand, MTN will acquire a post-transaction economic interest of approximately 25 percent in Bharati for an effective consideration of about US$2.9 billion in cash and newly- issued shares of MTN, close to 25 percent of the currently issued share capital of the South African firm. Whereas MTN’s economic interest in Bharti will be equity accounted and the company will enjoy appropriate representation on its board.

The proposed deal is expected to provide Bharti access to the under penetrated African and Middle East market but it might not be that easy for Bharti as it seems to be. Since, the African demographic profile is quite heterogeneous from rest of the world with markets having a population of less than one million and others having a population of less than five million also there are regions with high GDP/per capita but these regions all ready have a mobile penetration of over 80 percent. Thus, making it a tough task for Bharti to capture or create a market for itself in these regions which also raises an inevitable question on the implementation of Bharti’s low cost model in Africa.

Changes to Bharti’s shareholding
On the success of the proposed merger it is also expected that the shares of Bharti will increase from 1898 million to 2979 million leading to a dilution of 57 percent in the Company’s shares. The pre-deal shareholding pattern of Bharti Airtel consists of shareholders like Mittal (28 percent), Vodafone (4 percent), FIIs (21 percent), Indian Public / MF/Ins (12 percent). The post-deal shareholding pattern in Bharti Airtel is likely to bring down the shareholding of Mittal to 18 percent, Vodafone to 3 percent and FIIs to 13 percent. It is also predicted by some of the securities analysts that the deal might result in a dilution of 9 percent in Bharti’s earnings per share which may have a significant effect on Bharti’s stock price.

Vikas Srivastava is a legal associate of foreign direct investment at the Mumbai, India office of Dezan Shira & Associates. This article is for the sole purpose of providing general information on the merger of Bharti and MTN to the public at large and the information provided may change due to market forces. This article in no manner should be taken as a reference for carrying out any the kind of activity or trading related to India securities, securities of the companies mentioned in the article, or any other shares or stock market.To contact the author, please email mumbai@dezshira.com.