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BW Businessworld

Will The Call Disconnect?

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As Bharti Airtel and Aouth Africa’s MTN continue discussion on their $23-billion deal, a lot of speculation hovers around one question: Can this deal really take off to create the world’s third largest telco, as envisaged? There are several reasons why it may not take off. The biggest question mark is in MTN’s notorious history of leading potential partners into the boardrooms and then bombarding them with unreasonable demands. In the past three years, MTN has initiated negotiations for mergers, tie-ups with almost a dozen companies, including with Vodafone. It raised MTN’s stock price, but no deal materialised.

“MTN has its own set of expectations, which if not met, the deal terminates. If Bharti and MTN don’t satisfy each other’s expectation, the deal is unlikely to happen,” says Madhusudan Gupta, senior research analyst at Gartner.
In 2007, MTN’s proposed purchase of rival Telkom’s fixed line business fell through due to regulatory issues. In 2008, MTN was also talking to major European telecom major Deutsche Telekom and Russian telco Vimpel Communication, none of which materialised. UAE based Etilisat was also negotiating terms to bid in MTN, which never proceeded further.

But what worries observers is whether Indian telecom majors’ desperation to become global players — that got both Bharti and Reliance to the negotiating table last year and discuss as far as giving up control of the companies — is getting them into a trap.

The Bharti-MTN talks had started a year ago when, after a few rounds of discussions and announcements, Bharti backed out. Bharti, or Reliance Communications, for instance, would have been MTN subsidiaries if any of those deals had gone through.


What went wrong in 2008?
Lack of transparency from MTN’s side on the original agreement given by Bharti on 16 May.

MTN wanted a major stake of Bharti and Singtel (which has 30.5 per cent shareholding in Bharti) in return for a controlling stake in MTN.

Bharti and MTN talks could not thrash out who would control the joint entity.

Bharti did not agree to become an MTN subsidiary as MTN wanted. On 24 May, Bharti officially walked out of the deal.
What is happening in 2009?
Bharti will have a 49 per cent stake in MTN and MTN will acquire a total of 36 per cent in Bharti (25 per cent by MTN and 11 per cent by shareholders).

Bharti will participate in governance of MTN and will also consolidate accounts of MTN.

MTN’s stake in Bharti will be equity accounted; MTN will also have appropriate representation on the Bharti Board.

MTN’s direct cash pay for a 25 per cent stake stands at $2.9-billion plus MTN’s newly issued shares.

After receiving $2.9 billion in cash from MTN, net cash outflow for Bharti will be $4 billion.

Phuthuma Nhleko, MTN’s mercurial CEO, has structured all previous negotiations in favour of MTN. Which is why the architecture of the current discussion points — where Bharti would own 49 per cent of MTN, and MTN 36 per cent of Bharti — are not only surprising but also in dissonance with both MTN, and Nhleko’s known ambitions. “The envisaged transaction has been structured in the spirit of a partnership between the two parties. It is anticipated that existing management will continue to serve at both MTN and Bharti,” says a Bharti spokesperson. For, in any previous discussions not only would MTN have owned a majority of both Bharti and Reliance, but Nhleko would also have been the CEO of the combined companies. It is believed that Nhelko has sought to lead the Bharti-MTN combine this time as well.

Consummation of this deal will be as remarkable as some of Bharti Group Chairman Sunil Mittal’s characteristic moves that make him India’s largest private telco.

(Businessworld Issue Dated 2-8 June 2009)