Why Bharti-MTN Broke Up?
Anchor: We ask the question what went wrong in the Bharti-MTN deal and joining me to discuss that Lauri-Lynn Pursall, Partner of Mayer Brown, Bundeep Singh Rangar, Chairman of IndusView and Vivek Gupta, Partner at BMR Advisors.
The big question is what were the deal breakers? Here is what we know officially––the Bharti press release on Wednesday evening said, "This structure needed an approval from the government of South Africa which has expressed its inability to accept it in the current form." Hours after that a South Africa Treasury statement said, "When companies structure their relationships outside the current exchange control regulatory framework for such transactions, they require the approval of the Minister of Finance. This was the case with the proposed MTN-Bharti merger, which required certain exchange control and other approvals." But that's all the press release says since neither of these statements make any reference to a specific deal breaker, I spoke to a whole host of bankers and lawyers connected to the deal to piece this story together. However, it is entirely source based.
But here it is––sources say Bharti did not anticipate a South African demand for dual listing in the early part of the negotiation. In fact, all through the negotiations before May 25 and after since the deal structure had Public Investment Corporation's (PIC) approval dealmaker believe that to be tacit approval of the South African government. As PIC is a government-controlled fund sitting on the board of MTN as one of its largest shareholders. MTN was concerned about doing a deal through global depository receipts (GDR) and sources say it is MTN that insisted on Bharti asking for informal guidance from the Securities and Exchange Board of India (SEBI). That done both sides were expecting to announce a deal in the first half of September, and in fact, the offsite that Bharti management is currently on was meant to be a celebratory offsite and one to rally the troops to ensure deal integration. However, MTN went to the South African government for final clearance; the government was concerned about allowing the passage of control at MTN into foreign hands and raised the issue of protecting national identity. Dual listing was one such route. At first, MTN and the South African government only wanted some assurance from Indian officials that the African identity of MTN would not be compromised.
However, when Sebi amended the takeover regulations to distinguish between voting and non-voting GDRs, the South Africans got a bit spooked. If rules could change in a course of transaction then verbal assurance was not enough and so a South African government team arrived in
Whether MTN saw the writing on the wall and pulled out or there was some government pressure on MTN to pullout we will never know. But this is a source based story, I was able to piece together.
Q: Is this story plausible. What do you think was the potential deal breaker?
Gupta: The story bears out. It's obvious from the May 25 original press release, which was a detailed one, that significant amount of work had been done prior to the press release. It's also obvious that all stakeholders––the MTN board, the CEO, key stakeholders––were part of that statement. It was a joint statement, it was a deal that worked for Bharti, and it was a deal that worked for MTN. So it seemed like all the commercials were broadly in place. Then over the course of the couple of months, the exclusivity period and the negotiations happening, one heard of some constituents within the stakeholders of MTN wanting to sweeten the deals by a bit and in my view Bharti had the buffer to sweeten the deals somewhat–-5–7% and it does seem that Bharti would have exercised that buffer. So that done it does seem to me that the deal did not come unstuck on a commercial issue. It does seem to me that the deal came unstuck on a regulatory issue, and therefore, the story that you laid out at the beginning of the show seems fairly plausible to me.
Q: Would you agree that it was a regulatory issue, issues like would open offers be triggered or would this deal not be compliant with specific laws in either of the countries or do you think that this is a simple case of protectionism?
Rangar: It's a little more complicated than either one of them. It is possibly a simple case of protectionism. But I also think that something more is played here. If you think of the two players agreeing to commercials, having talked for now about two years of two rounds of discussions coming to an agreement why didn't the government of
Q: You have practiced law in
Pursall: The South African government is interested in maintaining companies registered in domicile within their borders. I cannot say if that was the concern in this particular scenario but that is part of the reason why others who have done dual listing out of
Q: Fit the dual listing concept into this deal for us. Where would a dual listing have had to be implemented? Would it be before the two companies proceeded towards the merger because that's what they said in their May 25 press release––Bharti would have 49% in MTN. MTN and its shareholders would have 36% in Bharti and then move towards a merger? Would the dual listing have to come before a merger, after a merger and how would it have allayed the fears of protecting the African identity and yet Bharti's commercial interest of having some control over MTN?
Pursall: Creating a dual listed structure entails having two separate companies reaching an agreement as to how they are going to manage a group of assets if it is one business and with that then they agree various methods of governing two separate companies. So they would agree as to how the board would be constituted. Usually you would have one single board or two boards with exactly the same board members on it and you would have one management structure reporting to both those boards. You generally see an implementation agreement which determines the ratio and that's the point that gives the commerciality to the deal and give their interest because you would determine a ratio between the two companies and that would be the voting rights that they would share in both companies. You will have to have a special arrangement as to how they would vote and presumably if the company legislation allowed for it the method of ensuring that the votes of one company have recognised when you have shareholders vote in the other.
Q: So would it mean that if Bharti was to have a 49% stake in MTN and MTN was to have 36% stake in Bharti that even if they had one common board under the dual listing structure Bharti would exercise more control on that board and MTN would exercise less control?
Pursall: Yes, evaluate each proportionate interest in the other and ensure that that is represented in the voting rights as their exercise at the shareholder meetings.
Q: What is the common benefit to shareholders of both Bharti and MTN because they would continue to be individually invested in either one of those companies? How does it work from a shareholder's perspective?
Pursall: There are very less reasons why you are going to a dual listing structure. The most common reasons would be for tax or accounting purposes. It might be that if did a full merger structure that you realise capital gains tax for one of the groups of shareholders which would not be a favourable position.
National identity is another reason if you want to maintain the registration of a company within a particular jurisdiction for political or social reasons and you then have your separate listings in each country, separate companies registered in each country. They would be able to say that they are still domicile, they are still a South African company or still an Indian company. They just share their voting and management and businesses.
Another reason might be that there might be joint venture structures within the group which have triggered provisions which means that outside third party joint venture could say there has been a change of control, and therefore, I am going to trigger my rights to buyout joint venture assets and a company could end up losing assets through triggering these provisions in any joint venture agreements. So you look at each of these dual listed structure that we have in place at the moment, each of them have particular reason for choosing that structure.
Q: What do you think the reason could have been in the case of Bharti-MTN? Why do you think the dual listing issue became such a big issue because in
Pursall: It's a structure
Q: If a dual-listed structure would still give Bharti higher voting rights on account of the higher share it had why would the South African government ask for it because technically control would still be with Bharti of that dually listed combination of companies or the two companies. Was it just the perception that MTN continued to be domicile and listed in
Rangar: Possibly. But if you look at it even 49% shareholding, they still had control. So they had 51% retained interest in MTN. Bharti was ultimately getting 49% and in return giving 36% of Bharti to MTN shareholders. S I am not quite sure that from a structure perspective it really changes anything. It's more of a perception issue. There are a lot of governments––
Q: Your thoughts on that?
Gupta: I agree with Bundeep. If you were to view this transaction in its two phases––phase one where the shares swap is happening, 49% in exchange of 36%. All the dual listing is doing is to operationally make available dividend cash flows on an effective as if basis to the two sets of shareholders and at that time the whole overriding issue of a South African domicile does not come into being because MTN continues its separate existence as a South African company because all that has happened is just a share swap.
Phase two that was in the May 25 statement––a mere intension, it did not seem like it was a bound agreed path. Phase two which was the merger phase is potentially where, perceptionally, there could be an issue of losing the South African domicile, and therefore, dual listing working out. But that seems to suggest that the government could have approved phase one of the transaction and held back phase two and one could seen how the law was in both countries and it would have been clear to both parties that eventual merger would be subject to resolution of this dual-listed company (DLC) issue. So I am not quite sure whether the DLC issue has been used in the end by the government on a control call that was taken in
Q: Do you have a view on that?
Rangar: Yes. If you look at the dual listing, as Lauri was saying, it is to give one company treated as two sides of a same coin. You are treating this as one entity with two access points for shareholders and in this situation it would not be fair to either MTN or Bharti shareholders. The growth rates in both countries are different as in one case a continent Africa and one case is a country,
Q: Do you agree that a dual listing could have put one set of shareholders at a disadvantage because of the limitations of the other company or the burden on the other company, expenses, etc. or the lower growth rates?
Pursall: I agree to some extent that it's possibly an outcome of having a dual listing. What a dual listing actually achieves is the merger status far quicker because from the moment you agree to dual listing and you agree to implementation and integration and agreements and agree a way of equalising to ensure that no one company shareholders benefit at the expense of the other. You have a mechanism with all shares together in the benefits and the risks that the business as a whole gets involved in wherever it is whether it is expanding into other jurisdictions or not.
Rangar: It is typically one company that has two listing like one on one exchange and one on the other. It's very unlike having two different companies have dual listing.
Pursall: We talk about cross listing which is one company having two listings. The dual listed company structure which you have seen a lot of large mining companies that involved in Rio Tinto and BHP Billiton all of them are two separate companies who are listed separately, who have totally different share registered but the underlying business is merged and operated as equally one entity.
Q: Final question to put to all three of you and this goes back to what you were saying which is the first phase of the transaction and why the transaction couldn't have stayed there. Do you think that Bharti would have been happy with just 49% stake in MTN, having spent all that money and having some sense of board controlled but maybe not all board control? Would it have made sense for this deal to start at phase one and stayed at phase one. There would have to be some other culmination wouldn't there?
Gupta: Not really. If Bharti owns almost half the asset economically and has board control, and therefore consolidates, the asset from a financial reporting perspective. It's not altogether a bad deal because Bharti gets access, Bharti gets control. As Bundeep pointed out, Bharti gets an edge. So I would not say that even if that were not to culminate into a desired outcome 36 months down the line of a full merger, I would not say that that would have been a big dampener for Bharti. The deal worked for Bharti in that format. If not in 36 months
Q: If that was the case why didn't they at least try to do just phase one? MTN and South Africa shouldn't have had any problem with that because Bharti would not have had complete control over MTN and then as and when the deal progressed and as and when capital account convertibility in India progress maybe they would have looked at other options or combination or a culmination so to speak?
Gupta: That's why I said in the beginning that I don't know or I don't understand why this dual listing issue was a big dampener. In my view, the deal should have happened as a phase one deal. Therefore it suggests to me that there is something greater, maybe, political as been they polluted to. There is something greater behind this deal not happening.
Q: Do you think as a lawyer that just doing this deal until phase one would have made sense for both parties?
Pursall: If it's a question of ensuring that it is a true merger having a significant shareholder block of 49% would effectively give Bharti control because to counteract any Bharti vote you need to have all the other remaining shareholders voting against which in a listed company is not considered a feasible option at all. So they would be seen as Bharti taking control over MTN and if they were concerned that the merger might not happen that might influence the decision making. I am only speculating on this point.
Q: Would you like to add to that?
Rangar: What I would say is that this seems such a thought through way of not making the deal happen that I suspect there is more than meets the eye. What I pointed at the very outset that if you wanted to the block the deal let us find the ways to break it, not happen, let us have the structure of dual listing which we know will not be acceptable in the current commercial agreement, especially, for phase two just like you said why not phase one. It only effects dividend distribution. So they should have gone ahead. It seems to me that the greater stuff behind the scene which is going on.
Source: http://www.moneycontrol.com/news/management/why-bharti-mtn-broke-up_417549.html
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