The much-hyped $23-billion deal between Bharti Airtel Ltd and Mobile Telephone Networks SA (MTN) deal was called off on Wednesday after nearly four month-long intense discussions.
MTN’s own compulsions and some last minute change of guidelines by the Securities and Exchange Board of India(SEBI) may have had a role to play in the deal being called off.
Last month, the market regulator had announced new guidelines which made it mandatory for entities acquiring global depository receipts or American depository receipts (GDRs/ADRs) with voting rights in an Indian company to make an open offer to minority shareholders if their shareholding crosses the threshold of 15%.
This new guidelines from SEBI materially impacted the original proposal between Bharti Airtel and MTN since the South African telecom giant would have to spend more for buying additional stake in Bharti Airtel.
Paradoxically, Bharti Airtel had a different version to this. According to the company, "the merger deal was called off after (the) South African government rejected the proposed structure."
Under the proposed deal, Bharti Airtel was to acquire about 36% of the currently issued share capital of MTN from MTN shareholders for a consideration of 86 rand in cash and 0.5 newly issued Bharti shares in the form of GDR for every MTN share acquired which, in combination with MTN shares issued in part settlement of MTN's acquisition of about a 25% post-transaction economic interest in Bharti, would take Bharti's stake to 49% of the enlarged capital of MTN.
The South African (SA) government owns about 21% in MTN through Public Investment Corp and wanted to maintain MTN's "South African character", which means it had reservations about the ownership and management control by a non-SA country.
SA Treasury said, "When companies structure their relationships outside the current exchange control regulatory framework for such transactions, they require the approval of the Minister of Finance. This was the case with the proposed MTN-Bharti merger, which required certain exchange control and other approvals."
This is the second time in just over a year when Sunil Mittal-led Bharti Airtel has been forced to abandon talks for amalgamation of the two organisations in a complex deal that also required Indian government's clearance for dual listing.
"The structure needed an approval from the government of South Africa, which has expressed its inability to accept it in the current form," Bharti Airtel said in a release.
"Whether a dead deal is good for Bharti Airtel or not, only time will tell. It could zero in on some other inorganic growth opportunity in some other corner of the world or it might altogether drop the idea of mergers & acquisitions. Right now it’s wait and watch. One also needs to see whether the Indian government is willing to amend its rules and laws to enable an increasingly ambitious India Inc to realise its global dream," said Indiainfoline in a note.
Another brokerage KRChoksey Shares and Securities Pvt Ltd, said, "With the deal getting called off, we believe that Bharti will catch up with the market and expect 10%-15% potential upside in near term. We expect Bharti’s management to set its focus on small and mid-size telecom players in emerging markets and expansion of the 3G network within India."
Wiser after the failed courtship, the two companies are most likely to redouble their efforts to scout for a partner once again after a breather.