Bharti-MTN talks off: Expert take on the road ahead

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Bharti Airtel has pulled out of the MTN deal citing too many movements from the latter's side as reason for the talks being called off. The Indian telecom major had signed the term sheet on May 16 which was presented to MTN, which then came out with a fresh proposal on Thursday. That was unacceptable to Bharti.

But, what do experts read into the Bharti Airtel -MTN deal failure?

Dalibor Vavruska, Telecom Analyst, ING Barings, is of the view that it was a very complex deal. "There is always a prediction that something is going to go wrong and something is going to cause the deal to collapse. Hence, it was not an absolute shock."

 

According to him, Bharti was very well positioned to close the deal especially given the concessions that they were offering. Not only today's announcement but also the previous couple of announcements indicated that there were issues in three plain areas, he said. "One is the control or political issue in terms of where the company is going to be headquartered or based, which now seems to be the main point of disagreement based on the announcement. Issues regarding funding and foreign ownership laws seemed to have been resolved. Thirdly, it is about the price."

 

However, Bharti is going to get some sort of exclusivity in negotiating this deal with MTN, he added.

 

Arvind Subramaniam of BCG believes that to conceive such a deal would have required a certain boldness of vision. "To persist with it, requires a lot of tenacity and to pullout requires a courage of conviction. So, we should not be too despondent that the deal hasn't gone through. This is part and parcel of the M&A game. Bharti has been a very successful and a highly regarded company even before this deal was talked about and will continue to be so. There is a lot of growth in the market in India itself. And they will continue to look for synergistic acquisitions," he added.

 

Rajiv Memani, Country Head, E&Y believes there was a very structured approach that Bharti followed to this entire transaction. "They had put a lid on valuation pretty early in the process. There are lot of synergies between both the companies. The emerging market footprint would have been tremendous, so they have worked all this out. The financing was arranged, which was very significant, at USD 60 billion in this market."

 

On regulatory pressures and politics:

 

Vavruska believes that certainly there is a political issue in South Africa. "The management of MTN is one of the prospective shareholders and is obviously very close to South African authorities and the government. They might not wish to do something that was seen as politically unacceptable from a South African standpoint," he added.

 

It is important to know the price component, he said. "But there are often cases where politics is used as an explanation and the real reason might not be exactly that."

 

On synergies in the deal:

 

Subramaniam said, "As regards to the MTN deal it was a very complex deal from what we read,  given the fact that the company and the complexity of operations and the regulatory environment in which it operates. So, there are synergies but the synergies would have taken some digging in of the deals to actually achieve."

 

Possible structure of the deal:

 

Accroding to Memani, Bharti would have looked at creating some kind of special purpose vehicle (SPV) and may be looking at some listings outside to issue shares to MTN's shareholders and look at some kind of a merger between MTN and Bharti. "All this with Bharti staying at the top and Bharti shareholding from the shareholders of Bharti staying very clearly in the company and then consolidating that into MTN. The structures as proposed by MTN are not very beneficial to the minority shareholders of Bharti and probably not very acceptable as well," he said.

 

How will the Bharti stock trade on Monday?

 

Vibhav Kapoor of IL&FS foresees that the stock should react positively to this development because when this deal started this stock really came down by about 10% or so. "There was always a fear that there would be a bidding war and Bharti would end up paying more than what the shareholders would have liked it to pay. Also, there was a question of leveraging the balance sheet to a very big deal of USD 40,000-45,000 billion. So, in a way investor might actually be relieved that the deal is not going through."

 

Finally, what do experts feel on the road ahead for Bharti post MTN?

 

According to Kapoor, at this price, given the fact that this deal is not taking place on its existing Indian business, the stock is relatively cheap and the growth is going to continue in India for quite sometime. "So, it is not that if the deal doesn't happen that's going to effect the growth of the company. At Rs 840-850, there is a lot of reasonable amount of upside," he added.