Almost a year after merger and acquisition talks had fallen through between the two telecom operators, Bharti Airtel and the MTN Group have announced the renewal of merger talks: the two telecom companies will discuss potential merger arrangements exclusively till July 31st 2009. Bharti Airtel is the largest telecom operator in India, while the South Africa based MTN Group is active in 21 countries.
According to the proposed arrangement, Bharti would acquire a 49% shareholding in MTN, and MTN and its shareholders would acquire an approximate 36% economic interest in Bharti, of which 25% would be held by MTN with the remainder held directly by MTN shareholders:
Proposed Scheme of Arrangement
— MTN would acquire approximately 25% interest in Bharti for approximately $2.9 billion in cash and newly issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.
— Bharti would acquire approximately 36% of the currently issued share capital of MTN from MTN shareholders for a consideration comprising ZAR 86.00 (around $10.36) in cash and 0.5 newly issued Bharti shares in the form of Global Depository Receipts for every MTN share acquired. This, in combination with MTN shares issued in part settlement of MTN’s acquisition of approximately a 25% in Bharti, would take Bharti’s stake to 49% of the enlarged capital of MTN. Each GDR would be equivalent to one share in Bharti and would be listed on the securities exchange operated by JSE Limited, South Africa.
— Bharti would have substantial participatory and governance rights in MTN enabling it to fully consolidate the accounts of MTN. MTN’s economic interest in Bharti would be equity accounted and would have appropriate representation on the Bharti Board. MTN would continue to be listed on the securities exchange operated by JSE Ltd.
— According to MTN, they will have certain rights to increase their stake in Bharti in the future.
Importantly, Singtel will remain a significant shareholder in case the proposed transaction is implemented. Bear in mind that this is the proposed arrangement, and it may not lead to any transaction; talks are at an early stage.
It’s worth noting that among MTNs priorities for 2009, was to raise money for its holding company by utilizing the capital markets in South Africa. This merger, could be another option.
Take a look at MTN Groups structure here.
Rationale For The Merger
A combined entity, according to MTN CEO Phuthuma Nhleko, will be strategically positioned for expansion in three of the fasted growing wireless markets, globally – India, Africa and the Middle East, with no overlapping footprint between Bharti Airtel and MTN. Bharti would be the primary vehicle for the companies to explore expansion into Asia, while MTN will pursue further expansion in Africa and the Middle East. While India has almost reached 40% teledensity, adding on an average, around 10 million subscribers a month, growth is expected to peter off, and competition for subscribers is expected to increase. Take a look at how MTN is performing in various markets here.
Companies like Maxis Malaysia funded Aircel, BPL backed Loop Mobile and Sistema backed MTS are expanding in India, while Etisalat backed Swan Telecom, Batelco backed S-Tel and Telenor backed Unitech Wireless are going to launch services soon. Juxtapose that with the impending institution of number portability in September – the competition is going to only increase in India. The West and Central African countries (WECA), and the Middle East and North Africa regions (MENA) where MTN operates are particularly attractive: subscriber base in 9 of MTNs 21 countries, grew by over 10 percent in the Jan-March 2009 quarter.
The combined entity will have revenue of over $20 billion and a combined customer base of over 200 million: both MTN and Airtel recently crossed 100 million subscribers.
Different Routes To 100 Million Subscribers
MTN and Bharti Airtel may each have 100 million subscribers, but the way the subscriber base is split is different. While a majority of Airtel’s subscribers are in India, MTN has a much wider geographical spread: with subscribers spread across as many as 21 different countries, and only 17.48 million subscribers in South Africa. MTN is the second largest telecom operator in South Africa, and had 36% marketshare, as of December 31st 2008. Airtel has recently launched services in Sri Lanka, and has operations in Seychelles.
MTNs largest subscriber base is in Nigeria, with around 25.9 million subscribers, and smallest in Cyprus, where it has only 170,000 subscribers. Growth, for MTN, appears to be coming from the West and Central African countries (WECA), and the Middle East and North Africa region. EBITDA margins and EBITDA contributions are highest for the WECA countries, at 53.1% and 59% respectively. The company is investing in a backbone rollout in Nigeria, Ghana, South Africa.
Do take a look at their 2009 investor presentation.
What Happened Last Year; What Has Changed
Talks had fallen through between MTN and Bharti Airtel last year, when, post a term sheet being initiated between the two entities on 16th May, MTN came back to Bharti with a structure significantly different from that which had been agreed upon: MTN had envisaged Bharti Airtel as a subsidiary of MTN and exchange of majority shares of Bharti Airtel held by the Bharti family and Singtel, in exchange for a controlling stake in MTN. Bharti thought of this as a “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.”
The talks were not viewed as being, well, even, since MTN had more subscribers than Bharti Airtel, with higher revenues, broader geographical base (21 countries), among other things. More at the Economist. Now with both companies having around 100 million subscribers, the negotiations may switch to considerations other than a per-subscriber cost of acquisition. After talks fell through, Reliance Communications got into the picture, but wasn’t very successful either.
Timeline Of MTNs 2008 Talks With Indian Carriers
May 5th 2008: Bharti Airtel announces that it has entered into an exploratory discussion with the MTN Group, subsequently, on May 6th, denying media reports that it’s put an offer on the table for acquiring MTN.
May 16th 2008: Reaches an in-principle agreement, and a term sheet was initiated between the two parties
May 21st 2008: The agreed term sheet is present to the MTN Board
May 24th 2008: Bharti withdraws from the talks, following the MTN board presenting a completely different structure to Bharti Airtel. Bharti Airtel sees this new proposal is as a convoluted way of getting indirect control of the proposed combined entity, which would have Bharti Airtel as a subsidiary of MTN
May 26th 2008: Reliance Communications enters into exclusive merger discussions with MTN
June 13th 2008: Reliance Communications alleges that Reliance Industries sent a communication to MTN, making a claim of the right of first refusal. Dismisses RILs claims “with the contempt it deserves.”
July 19 2008: Reliance Communications and MTN formally end talks.