Control by any other name

Often complexity is used to shroud the truth. So it seems with Bharti Airtel’s and MTN’s fearfully complex cash-and-shares swap. A combination between the Indian and South African telecoms groups would create the world’s third largest mobile group. But look beneath the zeitgeisty veneer of “South-South partnership”, and Bharti seems to be trying to get effective control of MTN on the cheap.

The cash-and-shares swap would give Bharti, which is run by Sunil Mittal, 49 per cent of MTN’s shares. That’s technically not a majority stake, should South Africa’s fiercely protective government ask. But, in practice, there’s little a shareholder can’t railroad through with such a stake. Bharti will get substantial but unspecified governance rights, apparently giving it effective control.

That’s all very well if MTN shareholders get a big premium. But that’s not the case.

Analysing this deal is complex because it involves cross-shareholdings as well as cash payments in several directions.

One way to see what is going on is to assume that the two companies were fairly valued before the deal and that no value is created by the cross-shareholding. If Bharti and MTN ultimately go the whole hog and merge, there may be value creation. But, for the time being, the synergies will be thin on the ground.

Using these assumptions, first look at Bharti. Start with its market capitalisation of $34.3 billion last Friday. Then subtract the $6.9 billion in cash it will be paying out to MTN shareholders — but add back the $2.9 billion of cash it receives from MTN as part of its payment for its cross-shareholding. That gets one to $30.3 billion. Its ultimate value should equal this $30.3 billion plus the value of its 49 per cent in MTN.

Then look at MTN. Its market capitalisation last Friday was $26.7 billion. Subtracting the $2.9 billion it is giving Bharti takes it down to $23.8 billion. To this should be added the 25 per cent stake it will receive in Bharti as part of the deal.

But what would Bharti and MTN be worth? Working this out is tricky because of the circular nature of these cross-shareholdings. However, it is possible to get there using simultaneous equations. The answers that pop out are $47.8 billion for Bharti; and $35.8 billion for MTN.

With these numbers it is finally possible to crank out what the deal is worth to MTN shareholders. First, they get $6.9 billion of cash. Then they receive an 11.3 per cent stake in “new” Bharti, worth $5.4 billion. (This is separate from the 25 per cent cross-shareholding that MTN itself would receive in Bharti). Finally, there’s their remaining 51 per cent stake in MTN, worth $18.3 billion. Tot it all up and that’s $30.7 billion — a premium of 15 per cent to where their shares stood on Friday.

Now, of course, there may be some extra goodies thrown MTN’s way before this story is finally over. There is some talk, for example, of the South African group’s shareholders being given some unspecified options to increase their stake later. And, if there is a full merger, Bharti might conceivably pay another premium. But unless such goodies are substantial, MTN shareholders may end up being short-changed.