South African government could not ‘accept the deal in current form’.
After over four months of negotiation and two deadline extensions, the proposed $23-billion cash-and-share-swap deal between Bharti Airtel and South Africa’s MTN has been called off.
A press release issued by Bharti this evening said the two companies had decided to “disengage from discussion”, owing to the inability of the South African government to “accept the deal in the current form”.
South Africa’s national Treasury said MTN informed it was not able to conclude the outstanding matters that would have enabled the transaction to proceed.
This is the second time in two years that talks between the two have failed (see table). The deal would have created the world’s third-largest telecom company. The press release added that Bharti would continue to “explore international expansion opportunities”.
Under the deal, the Sunil Mittal-promoted company was to acquire a 49 per cent “economic interest” in MTN. In return, MTN would have acquired 25 per cent “economic interest” in Bharti Airtel for $2.9 billion and MTN shareholders were to acquire another 11 per cent.
| CALL LOG |
| 2008 |
| May 6: Bharti Airtel begin talks with MTN to buy stake in the South African company |
| May 25: Bharti and MTN call off talks |
| May 27: Reliance Communications (RCom) and MTN sign a 45-day exclusivity agreement to negotiate a deal |
| Jul 19: RCom and MTN call off talks |
|
2009 |
| May 25: Bharti-MTN announce talks for a $23-billion share-swap-and-cash deal. Deadline set for July 31 |
| Aug 3: Bharti-MTN extend deadline from July 31 to August 31 |
| Aug 20: Bharti-MTN extend deadline again to September 30 |
| Sep 14: South African government says |
| MTN’s ‘South African character’ must be maintained |
| Sep 15: Indian government says open to dual listing in India |
| Sep 24: Officials from the South African government meet Sebi, RBI and finance ministry mandarins |
In total, MTN and its shareholders would have acquired 36 per cent in Bharti Airtel, India's largest telecom company, in the form of global depository receipts (GDRs) that would have listed on the Johannesburg stock exchange. MTN is also listed in Johannesburg and is South Africa’s largest telecom company.
“It would have been a good deal for both. But the problems were at the South African end since MTN is considered a crown jewel, so issues of control of the company are key for them,” said Mahesh Uppal Delhi based telecom analyst.
The South African government has a major say in MTN in which it owns 21 per cent through Public Investment Corporation. Statements by leading South African officials last month suggested that the government wanted to maintain MTN’s “South African character” and was looking for a different structure for the deal. This has been interpreted to mean that it had reservations about ownership and management participation by a non-South African entity.
A post-deal management structure also faced the challenge of complying with South Africa’s stringent affirmative action policies that mandate that the majority of the board and the management of the company needed to be Black.
In mid-August, the South African government approached India’s finance ministry to explore the possibility of allowing for dual listing for Bharti and MTN as a solution.
Dual listing would have enabled MTN and Bharti to have a separate legal existence and separate shareholders, but share the risks and rewards of ownership of all operating businesses in a fixed proportion. The two companies would have had the same board of directors and an integrated management team.
Finance Minister Pranab Mukherjee told the South African Finance Minister Pravin J Gordhan on the sidelines of the G20 summit that the Indian government would be open to allowing dual-listed companies but did not offer firm assurances. On September 10, he wrote a letter to Gordhan saying the issue of dual-listed companies was “receiving due attention from the government”.
Prime Minister Manmohan Singh who met South African president Jacob Zuma recently in the G20 summit last week in Pittsburgh also discussed the deal on the sidelines of the meeting.
Last week, however, hectic discussions between Indian regulatory authorities and South African officials suggested that though the Indian government was open to the idea, the policy would take a long time to be operational owing to the need for major changes, not least in terms of foreign exchange legislation and capital account convertibility.
On September 22, the Securities and Exchanges Board of India (Sebi) added to the complications by announcing that global depository receipts (GDRs) will now be treated on a par with equity and cannot be exempted from an open offer. Earlier in response to a query from Bharti, Sebi had ruled that foreign firms buying GDRs with voting rights in an Indian company are not required to make an open offer until those instruments are converted into equity.
With this change either MTN would have had to make an open offer, which it was unwilling to do since it would have raised acquisition costs, or Bharti would have to seek a special exemption on the ground that the two would merge, which could have been tough to obtain.
Agencies report that MTN Group requested that trading in its securities on the Johannesburg Stock Exchange be suspended on Wednesday. The rand, which depreciated 2.5 per cent to a dollar, fell the most since August 6, 2009.
