Bharti Airtel’s failed attempts to merge with MTN highlight the political and regulatory hurdles that plague international M&A deals

After almost two years, two attempts, half a dozen deadline extensions, regulatory reviews, political manoeuvring and secret negotiations, on 30 September 2009 India’s Bharti Airtel and South Africa’s MTN walked away from what would have been the largest global telecoms deal of the year.

The merger would have been worth around US$23 billion. Yet as the final deadline came and went, it wasn’t financial problems that poisoned the deal. Neither market forces nor corporate incompatibilities were to blame. Instead, the mega-merger was thwarted by regulatory roadblocks and political interference.

Building networks

India deregulated its telecommunications sector in 1999 and 25 operators appeared almost overnight. Many were ill-equipped to compete, and Sunil Bharti Mittal, the founder and chairman of Bharti Airtel, started buying them up as they faltered. By 2004 Bharti was a major player in India’s telecommunications market, although its presence was largely confined to the country’s major cities.

That changed over the period from 2006 to 2008, when Bharti began expanding aggressively into rural markets. Its margins were small but its subscriber base was growing rapidly. By 2009 the company had more than 100 million subscribers, and was growing so fast that the figures quoted in news reports on the prospective deal with MTN were out of date within a week of publication.

In the decade and a half since MTN’s inception in 1995, it had also grown quickly. The company has operations in 21 markets in Africa – the fastest growing mobile communications market in the world – and the Middle East. Like Bharti, it has more than 100 million subscribers.

MTN has made several attempts to tie up with a foreign company. In 2008 it explored the possibility of merging with Bharti’s rival, Reliance Communications. However, the deal was called off for legal and regulatory reasons resulting in part from a high-profile dispute between Reliance chairman Anil Ambani and his brother Mukesh.

The road to nowhere

Bharti first considered a bid for MTN in April 2008. In May it made an offer for 51% of the South African company. Mittal said he thought his company could “make dramatic shifts” in emerging markets around the world. The deal would have made MTN a subsidiary of Bharti but would also have given MTN a stake in the Indian company.

Bharti’s bid was largely motivated by differences between the two companies’ operating environments. On a per minute basis, India is the cheapest telecommunications market in the world and providers operate on very small margins. An average Indian consumer spends just US$4 per month on telecommunications. By contrast, the margins in MTN’s markets are much higher, largely a result of scant competition. This made it a very attractive proposition to Bharti, despite the fact that the South African company’s costs were considerably higher than its own. Indeed, research by HSBC concluded that MTN’s costs per base station were three times those of Bharti.

As soon as Bharti made its announcement speculation was rife that a bidding war would ensue. Vodafone quickly ruled itself out. Reliance kept its cards close to its chest but did not make a rival bid for MTN.

The negotiations between Bharti and MTN broke down within a month. The stumbling block was the structure of the combined company and disagreements over who would control it. But just one year later, the companies were back at the negotiating table.

Reconnecting the networks

On 25 May 2009 a second prospective deal between Bahrti and MTN was announced. The arrangement under consideration was far from simple. Bharti would buy a 49% stake in MTN with a combination of cash (about US$5 billion) and shares. MTN would pay US$2.9 billion in cash and newly issued shares for a 25% stake in Bharti. AZB & Partners negotiated for its long-term client Bharti with a team led by Ajay Bahl and Gautam Saha. Freshfields Bruckhaus Deringer represented MTN.

Protracted negotiations followed and several changes were made to the details of the deal. Bharti increased its cash offer, but lowered the stake that MTN would take. The number of MTN shares on offer was also adjusted. The discussions continued and the 31 July deadline for concluding the deal was missed. The deadline was extended to 31 August and then again to 30 September – the date on which the merger was abandoned.

What went wrong?

During the four months from the announcement of the deal to its abandonment, both companies’ share prices rose. Officials in each camp expressed their optimism while analysts hailed the emergence of a new breed of multinational corporation, born and bred in emerging markets.

Yet as the glowing reports continued to flow, cracks began to appear beneath the surface. The companies were reportedly having difficulty in mapping out and agreeing upon a management structure for the merged entity. Analysts, meanwhile, began to believe that the achievable efficiencies of the deal would be less significant than initially predicted. Expectations were moderated: the deal was still likely to go through as a cross shareholding arrangement, but it was increasingly felt that a full-scale merger would take some years to complete.

Up to this point such accommodations and adjustments seemed to be a normal, unavoidable aspect of concluding such a large and complicated deal. “You are talking about a partnership and when you are looking at a partnership it is that much more complex,” Mittal told the Financial Times.

But then the politicians got involved. During the weeks leading up to the initial 31 July deadline, the government of South Africa made its concerns over the prospective overseas migration of MTN’s control publicly known. It sought to retain the company’s listing in Johannesburg and stated that it might not allow a foreign entity to control what it considered to be a company of strategic national importance. Much discussion centred on the fact that a significant portion of MTN’s shares – about 20% – is held by the South African government’s pension fund.

A crowded field

With a new obstacle threatening the deal, Indian politicians, regulators, industry bodies and consumer groups were quick to join the debate.

Telecom Watchdog, a Delhi-based non-profit group, alleged the deal would violate India’s foreign ownership cap of 74% for listed companies. Singapore based SingTel already owned around 30% of Bharti and Mittal held his stake from overseas. With additional shares being allocated to MTN, the threshold would be exceeded. Ominously, Telecom Watchdog already had a lawsuit pending over the controversial merger that created Hutchison Essar (now Vodafone Essar).

Exploring all the options: Several structures were considered for the deal, but none could satisfy both the companies and the regulators.
Exploring all the options: Several structures were considered for the deal, but none could satisfy both the companies and the regulators.

The Securities and Exchange Board of India (SEBI) said MTN would probably have to issue an open offer for at least 20% of the shares in Bharti, a rule that is triggered by the acquisition of 15% or more of a listed company. Issues of foreign currency convertibility were also raised in relation to the deal. However, SEBI encouragingly noted that Bharti could meet regulatory requirements by doing the deal with cash and global depository receipts rather than shares with voting rights.

In September 2009 SEBI amended its open offer rules, a change Yash Rana of law firm Goodwin Procter believes was a direct response to the Bharti-MTN deal. “There had been some suggestion that the open offer rules would be relaxed,” Rana says. “However, recently SEBI made them more onerous by requiring the open offer be made for 20% of shares listed overseas as well.”

For their part, Indian government officials, including newly appointed finance minister Pranab Mukherjee, expressed support for the deal. Such cheerleading went right to the top when, four days before the final 30 September deadline, the prime minister, Manmohan Singh, publicly endorsed the merger.

The irresistible meets the immovable

During the final round of negotiations between MTN and Bharti the concept of a dual listing became a firm requirement of the South African government. It insisted that the deal could only proceed if the merged entity would be dual listed on an Indian and a South African exchange. It also stated that MTN was a strategic company, the ownership of which must remain in the country. These demands were ultimately to prove fatal to the deal.

“This structure needed an approval from the government of South Africa, which has expressed its inability to accept it in the current form,” conceded Bharti in a statement. The share prices of both Bharti and MTN fell considerably.

“We hope the South African government will review its position in the future and allow both companies an opportunity to reengage,” said Mittal on 30 September. MTN issued a statement the same day blaming the failure of the deal on a general lack of commitment. The parties “were not able to conclude all outstanding matters to enable the transaction to proceed,” the statement read.

Third time lucky?

Bharti has since announced plans to focus on acquisitions in Asia, including one in Bangladesh that is already underway (see News, page 8). But if Mittal’s words of 30 September are to be taken at face value, a third attempt at the MTN deal may not be beyond the realm of possibility.

In mid-January Rajan Mittal, the vice-chairman and managing director of Bharti Enterprises, travelled to Lagos to attend an Indo-West Africa business forum. Had events unfolded differently, he may have made his calls on a Bharti-controlled network while on business in Nigeria.

In Lagos, reporters approached Rajan Mittal and asked about the potential for reviving the deal. If it had been tried twice, then why not a third time? But Mittal did not waver: “The MTN chapter is now closed.”