October 2009
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Second time Unlucky

In the aftermath of the failed tie-up between MTN and India’s Bharti Airtel, one fact has emerged — nobody was enamoured with the deal except the protagonists themselves.

Politicians on both sides of the globe were ambivalent at best. While various ministers and officials theoretically welcomed the influx of foreign currencies into their respective countries, neither side was keen enough to amend the laws that made the deal unworkable. National pride also played a part. Comment by SA’s Communications Minister Siphiwe Nyanda that MTN was South African and should remain so were matched by similar sentiments in India.

When the operators first tried to merge a year ago, the talks failed over the thorny issue of who would control the entity that emerged. This time, the talks involved a cross-ownership alliance, rather than a full-blown merger, to avoid sacrificing national ownership or independence. But that saw them clash with regulations in both countries.

Bharti blamed the South African government and “its inability to accept” the structure of the proposed deal. MTN concurred, saying they had “not been able to conclude a transaction within the economic, legal and regulatory framework within which both companies operate”.

SA’s Treasury was no doubt stung for having to shoulder some of the blame, and responded by saying MTN and Bharti ended the negotiations after Finance Minister Pravin Gordhan met MTN chairman Cyril Ramaphosa and CEO Phuthuma Nhleko.

“MTN advised the minister that the two companies have mutually decided to terminate further discussions on the proposed merger as they were not able to conclude all outstanding matters to enable the transaction to proceed,” the Treasury said.

But that is disingenuous, as the deal failed because it could not be shoehorned into the regulatory frameworks demanded by the two governments. The Treasury said it and the government were, in principle, supportive of local companies that wanted to grow and diversify offshore, particularly into emerging and developing countries.

But support in principle does not translate into support in practice.

While the Treasury said the structuring of such deals was best left to the companies, if the structures clashed with exchange controls they required the approval of the minister of finance. So this deal would have required exchange-control approval, and the Treasury never needed to say if it would have acquiesced.

South African officials had asked India’s government to allow MTN a dual listing, so the operations could be merged while keeping their shareholding structures intact. Indian law does not permit dual listings, so that plan was also not an option.

Bharti says it hopes SA’s government will review its position and give both groups an opportunity to re-engage. Shareholders of both groups probably hope that is polite rhetoric that will not become reality.

Bharti’s share price gained the most in four months yesterday after the 24bn deal was scrapped, jumping an exuberant 12%.

“It is a bit of a relief for us,” said P Phani Sekhar, a fund manager at Angel Broking in Mumbai. “The deal structure was not clear. We are comfortable with Bharti’s business in India.”

Bharti rose just 0,1% last month, becoming the worst-performing share on India’s benchmark index as investors stayed away, seeking clarity about the deal.

MTN’s share price rose about 6% to an intraday high of R129,45.

Imara SP Reid analyst Steve Meintjes now rates MTN as an add, agreeing the collapse was about regulatory issues as much as the merits of the deal. He warns that big foreign direct investors may take their cue from these regulatory complications and “be missing in action in future”. Defending national champions can be done just as effectively in the absence of forex controls, he says.

Had the deal cleared those hurdles, shareholders would have had to decide if Bharti’s offer — which started at R86 and half a Bharti share for each MTN share — was sufficient, given MTN’s long-term growth prospects. Many investors were perplexed by its determination to strike a deal and some utterly opposed it because of MTN’s vast potential as a standalone player.

MTN has grown phenomenally through acquisitions and by entering greenfield markets, and its operations in Nigeria and Iran now outstrip its South African network. Many of the 21 countries where it is active are barely tapped compared with the penetration it will achieve with its aggressive network roll-out.

True, there are no greenfield countries left to enter, and since several operators compete in most territories, growth caps will come eventually.

Yet analysts saw this deal as giving away 49% of MTN’s growth prospects to an Indian partner, while gaining only 36% of Bharti’s profits in exchange.

Chiluba Mumbi of BM Inc Capital believes regulatory issues were only a fraction of the story, and does not view the sinking of the deal as “a rabid pro-SA stance”.

“I would argue this has saved MTN from itself,” said Mumbi, himself a former senior member of MTN’s mergers & acquisitions team. “Management have played a bit fast and loose with this asset and should have quickly figured out the regulatory landscapes they were dealing with. You cannot blame regulators for enforcing markets rules. MTN has been saved from a deal which was never good for the mass of shareholders.”

MTN would have sold its control without a clear premium in a deal timed when the markets were unfavourable, he says.

“This has left a lot of egg on the faces of MTN management, because having achieved success inorganically through mergers and acquisitions, this was a deal too far.”

MTN should not look to buy many assets in the immediate future, and should learn to be a telecoms operator again and not an acquisitions shop, he says. It must restructure and rationalise and the managers must show how good they are at operations, he says.

Yet that has not been MTN’s modus operandi so far, and since it is remaining independent, it would be no surprise if Nhleko leads his team in a fast and aggressive expansion drive to compensate for six months wasted on this aborted deal.

It could grow through piecemeal acquisitions of far smaller African and Middle Eastern players. Or it could go after the African operations of Zain, the Kuwait-based operator that has not made a financial success of its 3,4bn takeover of Celtel in 2005.

MTN wanted to buy Celtel itself, but its bid was trumped by Zain. Since Bharti is now unattainable, Zain Africa may look alluring again — and how delicious it would be for MTN to finally acquire those networks for itself.

Asked earlier this year whether he was interested in Zain Africa, Nhleko said if the Bharti deal did not reach fruition he would “sit down and have a look”. MTN would look at whatever made sense, and if there were no regulatory problems or overlaps “there is absolutely no reason why we wouldn’t explore it”, he said.

Analysts at AfricaNext say valuing Zain Africa is tricky. It could be assessed as the highly profitable pan-African operation it used to be, or on its lacklustre performance over the past 18 months. That values it at anything from 6bn to 10bn.

There is much to like in Zain Africa, AfricaNext says, with 41-million subscribers, good growth, a presence in potentially high- growth markets, and cash-generation capabilities. Yet its operations are a hodgepodge of the good, the bad and the ugly. Niger, Gabon, Tanzania, the Congo Republic , Zambia and Nigeria are premium assets. But eight of the 15 networks that would be sold are unprofitable, and net profit is dipping at most.

However, that is exactly the sort of scene MTN would relish, with its history of streamlining inefficient operations by imposing its management skills and operational experience. Additional reporting by Reuters and Bloomberg.

Source: Business Day

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