The wedding's off but, for MTN, life goes on - TechCentral

The wedding’s off but, for MTN, life goes on

Paul Theron

[By Paul Theron] After five months of wrangling, the second attempt by MTN and Bharti executives to form a mobile giant in emerging markets has collapsed, just short of the altar.

Bharti says that the SA government kiboshed the deal: “This structure needed an approval from the government of SA, which has expressed its inability to accept it in the current form.”

However, Pravin Gordhan says MTN executives informed him on Wednesday morning that the two companies had decided by themselves to terminate the process. Perhaps he is being a little disingenuous because he went on to concede that “when companies structure their relationships outside the current exchange control regulatory framework for such transactions, they require the approval of the minister of finance.”

Other sources suggest that the SA treasury had resisted the complex first-stage share swap as announced back in May, and had been pushing for a single-entity, dual-listed structure similar to that used by Investec and Mondi. For various reasons, the Indian government was not keen on the idea, so the process deadlocked.

It should be noted that many MTN shareholders felt that the terms of the original deal were not sufficiently attractive, and indicated that they would only vote for the deal if a higher cash premium was forthcoming. MTN’s recent interim results were mixed, so these comments were tempered somewhat in recent weeks, but SA asset managers are not known for their ability to see the other side of an argument.

Bharti’s protestations that a partial merger and the offer of JSE-traded Bharti global depositary receipts offered SA shareholders plenty of optionality in the deal seemed to be falling on deaf ears.

While Bharti has fingered the SA government, it is clear that the Indian authorities must also shoulder some of the blame for the breakdown. For example, the issue of voting rights for SA holders of Bharti global depositary receipts was never satisfactorily resolved.

Politicians in emerging economies are happy to have their top companies doing the buying, but do not want to see control of their national champions pass offshore, even to the elites from similar countries.

Though this seems annoying and short-sighted, it is to be expected, because it happens everywhere. The US blocked a deal to sell its ports to Middle Eastern interests, and the French famously deemed yoghurt maker Danone to be a strategic asset.

What is more, governments are heavily involved with mobile operators because they license them and closely regulate their service levels and their profit margins. In turn, these companies are major investors in new infrastructure, and significant taxpayers. They are high profile and popular (perhaps because they spend heavily on sports and other sponsorships), but they face considerable pushback from customers over tariff levels.

The collapse of the talks is an unmitigated disaster for the advisory investment banks: BofA/Merrill Lynch and Deutsche Bank for MTN, and Standard Chartered for Bharti, were set to earn up to US$70m had the deal closed. The failure fees are 5% to 10% of that. Could this mean that a last gasp effort to resuscitate the deal may be seen?

For MTN, life goes on. The present MTN business, which rests on its three major operations in SA, Nigeria and Iran has many attractions.

The company is set to earn around R10/share in 2009 and we expect it to grow that by about 20%/year in 2010 and 2011. In that light, the current share price around R122 seems undemanding. There are other deals to be done, and other marriage proposals to be considered.

The next few days of trading in the JSE may see heavy trade in the MTN share, as short-term traders, hedge funds and other opportunists head for the exits.  For long-term believers in the obvious investment attractions of mobile telephony in emerging markets, this could present a good buying opportunity.

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