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Bharti Airtel Chairman Sunil Mittal has gone to London to meet Phuthuma Nhleko, CEO of South Africa's MTN
A day after announcing his interest in taking over MTN, Bharti Airtel chairman Sunil Mittal is learnt to have gone to London to meet the South African company's CEO Phuthuma Nhleko.
The meeting assumes significance as Mr Nhelko not only runs the largest South African operator, but also is a close confidante of MTN chairman Cyril Ramaphosa. "It's important for Mr Mittal to explain the details of his bid and his future plans with the company," sources close to the development told ET.
Sources said Mr Mittal's plan for MTN would include retaining the top management of the foreign company, including its chairman intact, post acquisition.
"Bharti is eager to offer him the position of co-chairman, in case it wins the race. Mr Ramaphosa is politically well connected in Africa. His experience will help Bharti immensely if it manages to keep him," they added.
Mr Ramaphosa is a well-known trade union leader, prominent anti-apartheid activist and a leader of the African National Congress. After apartheid was abolished, he moved over to the corporate sector.
Bharti, however, reiterated on Tuesday that talks are "exploratory" and "that it has not made any offer to acquire the whole or part of MTN... Details of any transaction will be released promptly, if and when, the parties reach agreement. As a responsible listed company, Bharti will continue to uphold the highest levels of transparency and corporate governance."
MTN shares reached 14-year high to rand 152.01 ($20). At this price, MTN is valued at nearly $40 billion. However, MTN is worth between rand 167.62 and rand 183.74 a share, JPMorgan Chase & Co said in a note to investors on Tuesday. That's as much as 15% more than the current price.
Bharti's shares closed down 5.3% at Rs 846.60 as investors feared it may pay too much for MTN in case of a bidding war. UBS too estimated MTN's enterprise value at nearly $40.6 billion, about 16% higher than its current market capitalisation of $35 billion and about 10 times MTN's earnings before interest, tax, depreciation and amortisation of $4.1 billion.
Bharti is believed to be eyeing 51% stake in MTN, which has 68.2 million subscribers across 21 countries. However, 51% stake may not help it consolidate the cash flows of MTN, which is necessary if Bharti is making a leveraged bid, an investment banker familiar with overseas transactions said.
Traditionally, LBOs (leveraged buyout) involve the acquirer taking the target private. In this case, it is difficult to see how Bharti will do a leveraged transaction without taking 100% of the company, he added.
Also, Bharti will need to pay a premium over the current market price to MTN shareholders, which could take the price tag to $45 or $50 billion. A 100% acquisition at such a hefty price will be difficult without substantial equity support, the banker added. Media reports said Bharti had offered $21.8 per share while MTN was quoting $23.8.
"With passing time, MTN's share is coming close to what Bharti is offering. The question is whether MTN will remain attractive beyond a price point," Angel Broking analyst (IT and telecom) Harit Shah told ET.
According to sources, Bharti and Singtel's first step could involve buying out the 23% stake that the Alpine Trust holds in MTN. (The Alpine Trust is owned by Newshelf 664, which is a company constituted by the MTN staff and management and also South Africa's Makati family).
In the next step, the duo may buyout PIC, a South African government-owned pension fund, which has a 13.5% stake in MTN and is the second largest share holder in the company, sources said. Following this, Bharti may make an open offer for an additional 15% stake, which will enable it to take its shareholding to over 51%.
Back of the envelope calculations indicate that Bharti will have to fork out over $9 billion to buy the stake held by the Alpine Trust and an additional $5.4 billion to PIC at the current valuations. In such a scenario, market watchers share the view that this would result in MTN's net debt as a percentage of market capitalisation going up to over 60% when compared to the current 3%.
Such a scenario will also result in Bharti being forced to let MTN remain listed, or relist the company. This is because, under South African laws, if any company acquires over 35% in any company, it must make a mandatory offer to the minority shareholders.
Bharti is also learnt to have received commitment of $12 billion from Standard Chartered Bank and Goldman Sachs, each having underwriten $6 billion, according to overseas media reports. They said Bharti may offer fresh shares to MTN shareholders or to institutions, or both, to organise the additional fund, which could be to the tune of $8 billion.
British telco Vodafone is also learnt to be interested in MTN. However, it has not issued any official statement expressing its interest in the telco. According to a Goldman Sachs report, telecom mergers and acquisitions in the last few years have been at an enterprise value/Ebitda value of at least 10 times.
"This leaves very little room for an upside even though the valuation differs from company to company," said Mr Shah.