Bharti's MTN chase hits hurdle

NEW DELHI: Bharti-MTN negotiation on the proposed merger has hit a regulatory roadblock. A senior banker close to the deal said first round of talks in London has ended on a cordial note but left a huge task ahead - to find ways to overcome regulatory hurdles, particularly in India. It is learnt that Bharti Airtel chairman Sunil Mittal has agreed to go for merger of both the entities as it would create huge synergies but sought help from MTN management to find solution for meeting FDI norm in India, which stipulates that foreign holding in a telecom company cannot exceed 74%. According to the source, MTN management wants the deal to be completed at around 175 rand per share, which makes its market capitalisation of the company at about $50 billion. The source added that MTN management wants 50% of the deal should be done in cash and the rest through share-swap. Even if Bharti pays $25 billion cash, it will have to issue fresh shares worth $25 billion to MTN shareholders to complete the deal. Around 65% of the holdings in Airtel Bharti (M-cap around $40 billion) is with foreign entities. Issuance of fresh shares of $25 billion to MTN's shareholders will take foreign holding in the joint entity to over 78%, which is not allowed under Indian FDI norms. One way out is to increase cash component. But the source said Bharti is not even comfortable with 50% cash component, as it would require the Indian company to arrange for $25 billion. The company has tied up $12 billion. So it needs to raise $13 billion more. He added that raising entire amount under debt would create huge debt liability, which the company would like to avoid. Raising money through selling equity would also be difficult, as without participation from FIIs, it would not be possible for the company to raise such a large funds from the market. FIIs' subscription in equity would make it difficult to maintain FDI norm in share-swap. As FIIs' holding in Bharti Airtel is around 25%, the source said merger might face regulatory hurdle. The merger would also face problem in clearing the broad-based black economic empowerment (B-BBEE) norms in South Africa, where 20% of merged entity's shareholding should be with black investors. If cash component is increased, proportion of black investors might go down below statutory requirements. Success of the deal now depends on merchant bankers, who will have to ensure that the deal goes through without violating regulatory norms.