Control by any other name

26 May 2009 By John Foley Follow @johnsfoley

The proposed cashandshares swap between the Indian and South African telecoms groups is fearfully complex. But, on the basis of information so far released, it would give Bharti effective control in exchange for only a modest premium for MTN shareholders.

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The maths in this article are a revision on a previous version

Bharti Airtel, the Indian telecoms group run by tycoon Sunil Mittal, renewed talks with MTN Group, the South African telecoms firm, over a cashandshares transaction that would form a prelude to a full merger. The two firms considered a tieup in 2008 but were unable to agree on the terms.

Under the complex proposed structure, Bharti would acquire 36% of MTN's shares from existing MTN shareholders. In return it will pay ZAR86 ($10.32) per share plus half a new, Johannesburglisted Bharti share.

MTN would then acquire from Bharti a 25% posttransaction economic interest in the Indian company. In return, it would issue to Bharti more shares, equivalent to 25% of its current capitalisation, as well as paying the Indian group $2.9bn in cash.

Following the transaction, Bharti would be left with 49% of MTN's shares, and would consolidate the African firm's accounts. Bharti would also have substantial but unspecified governance rights in MTN. MTN's economic interest in Bharti would be equity accounted and would have appropriate representation on the Bharti Board.

MTN shareholders may receive an option to increase their stake in a merged entity in future, according to a person familiar with the situation.

Both sides have until July 31 to negotiate exclusively with one another. Were a deal to be proposed, it would be structured as a scheme of arrangement, which normally requires the approval of 75% of shareholders.

Standard Chartered is advising Bharti, while Merrill Lynch is advising MTN.

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