On the first day of trading on the Indian stock exchanges after news broke that negotiations between Bharti Airtel and South African telecom giant MTN had broken down, the stock of the Indian wireless major recorded its biggest gain in a fortnight (of some 2.7 per cent). Clearly, punters in the Bharti stock were relieved that Chairman Sunil Mittal will not be stretching the company’s balance sheet, and enveloping it in a sea of debt in order to finance the acquisition.Yet, from a long-term view—something traders on Dalal Street aren’t particularly known to have—an acquisition of MTN would have been just what the doctor ordered for Mittal as it would have given Bharti a toehold in fastgrowing markets.
To be sure, MTN has an attractive geographic spread, which includes 21 countries across Africa and West Asia, giving it a total subscriber base of just under 70 million (as against Bharti’s 61 million). But what would have been the deal of the decade wasn’t to be. With MTN being valued at close to $50 billion (Rs 2.15 lakh crore), this was supposed to be corporate India’s biggest-ever international acquisition, putting Tata Steel’s buyout of Corus in the shade. Yet, less than three weeks after the drama officially began, on May 24 Bharti announced that the transaction was off.
So, why did the deal break down? Simply put, whilst Bharti was dreaming of a takeover, MTN had other ideas. Not only did it want more money per share, it actually wanted Bharti to merge itself into MTN. Bharti’s irritation was apparent in the text of an emailed release to the media: “Bharti believes that this convoluted way of getting an indirect control of the combined entity would have compromised the minority shareholders of Bharti Airtel and also would not capture the synergies of a combined entity.”
One of the ‘minority shareholders’ Bharti is referring to is, of course, Singapore Telecom (SingTel), which owns 30.8 per cent of the equity of Sunil Mittal’s company.
The Singaporean telecom operator would have found its position severely compromised in the event of a merger between MTN and Airtel. What’s more, given South Africa’s strict rules for ‘Black Empowerment’, the country’s version of affirmative action, the black population of the country has to own a certain percentage of any company listed in South Africa. This, coupled with the fact that Bharti Airtel had already hit the maximum 74 per cent foreign ownership ceiling allowed by the government of India, would have left little room for SingTel to manoeuvre around. If Bharti had folded into MTN, both the Mittal family and SingTel would have lost their clout over the operator.
Clearly, MTN was in no mood to be acquired. And Bharti, which had begun ‘talks’ as a prospective acquirer, was in no mood to play second fiddle, either. Unsurprisingly, within hours of Sunil Mittal pulling out of the deal, rumours surfaced that Anil Ambani’s Reliance Communications(RComm) was in talks with MTN. This was confirmed by the company in a release to the stock exchanges on Monday, May 26.
R-Comm also said that it had entered into ‘exclusive’ talks with MTN (the exclusivity factor had been absent in Bharti’s dealings with MTN). However, with the MTN Board demanding a high price, R-Comm might have to shell out a lot more than Bharti was prepared to give; and, like Mittal, Ambani might also be loath to give up control of R-Comm.
Unlike Mittal, however, Ambani does not have a large minority shareholder such as SingTel to keep happy. Analysts are skeptical that Ambani can pull off a deal for now. But there was little clarity at the time of writing of what lay ahead. What was certain is that Bharti is out of the race for MTN. MTN, for its part, was still in play.