Bharti-MTN failed deal
Agarwal, Vikram - MUMBAI
Bharti – MTN failed deal
In 2008, Bharti proposed to acquire an approximate 40% stake in MTN. The companies reached an in-principle agreement and executed a term sheet. Thereafter, MTN proposed an alternate structure which contemplated the acquisition of the majority of Bharti's shares, thereby making Bharti a subsidiary of MTN. The modified deal structure was unacceptable to Bharti, as it was not in favour of compromising the interests of its shareholders. As a result, the deal was aborted.
In 2009, against the backdrop of a completely different global economic market, the two companies recommenced their merger talks. According to media reports, the complex transaction structure envisaged that Bharti would acquire a 49% stake in MTN and, in turn, MTN and its shareholders would respectively acquire a 25% and 11% economic interest in Bharti, amounting to a total of 36%. The term 'economic interest' implies that the shareholders have no voting rights, but are entitled to receive dividends and enjoy pecuniary benefits. The MTN shareholders would have acquired the stake through the issue of global depositary receipts by Bharti. A global depositary receipt is effectively a depositary receipt which represents the underlying equity shares of a company, which in this case would have been Bharti. MTN shares would have traded on the Johannesburg Stock Exchange.
The closure of the deal was greatly anticipated and the overall perception was tilted in favour of its completion. However, it fell through, allegedly due to regulatory issues. According to speculation, the principal reasons were the prohibitions on dual listing and capital account convertibility. MTN was keen to retain its independent identity and insisted on dual listing. However, in India, dual listing is not permitted. Dual listing is the process by which a company can be listed and traded on the stock exchanges of two countries. Thus, it allows companies to retain their separate legal identities. Shareholders can buy and sell the companies' shares on the stock exchanges of the countries in which their shares are listed. Consequently, there is no legal merger.
In the Bharti-MTN case, dual listing would have meant the existence of two separate entities under a common management. However, despite talks at the highest level to introduce the dual listing concept, the Indian government
did not rush to take any action in this respect. In order to allow dual listing, numerous existing laws would require major amendments, including the Companies Act 1956, the Foreign Exchange Management Act 1999, the Securities Contracts (Regulation) Act 1956,
the Listing Agreement and the Takeover Code. Dual listing would also require capital account convertibility, which at present is not permitted in India. The Indian regulatory regime allows current account convertibility, but is not yet completely open to capital
account convertibility. Once permitted, it will allow the easy exchange of local currency for foreign currency for the acquisition of capital assets abroad. Therefore, the prerequisite for dual listing (ie, capital account convertibility) will enable investors
to buy shares of a dual-listed company in one country and sell them in an overseas market. It will give investors the ability to move freely from local currency to foreign currency and
vice versa.
These two regulatory hurdles turned out to be the eventual deal breakers.
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A more detailed presentation by Nishith Desai Associates just before the second version of the deal fell through is available here
If someone gets the opportunity, please pull out similar notes for the Ranbaxy – Daiichi merger and share with the group.
Thanks,
Vikram
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