Bharti, MTN Deal Could Hit Legal Hurdle

Mergers, Acquisitions and Financial Results

The Indian telecoms watchdog has threatened legal action if the proposed deal between Bharti Airtel and MTN breaches India's foreign-ownership rules. But MTN's suitor is reportedly teaming up with its Singaporean partner to form a special purpose vehicle (SPV) to avoid the anticipated legal hump.

MTN and Bharti are holding talks that might see Bharti acquire Africa's largest cellphone company in a cash and stock transaction that could be worth more than US$45bn.

But the Financial Times said last week that the Indian Telecom Watchdog claimed that the proposed stock element of the deal, in its present form, would increase Bharti's foreign ownership above the 74% limit allowed under Indian law. The watchdog threatened legal action if this limit was breached.

"We are happy if (Bharti) buys 51% of MTN," Telecom Watchdog secretary Anil Kumar said. " But in case of a share swap, they will definitely breach the FDI (foreign direct investment) cap. We will oppose it. If the deal is hung in court, who will suffer? SA will suffer," said Kumar.

The Delhi-based organisation is involved in legal action over Vodafone's US$10.9bn deal to take control of Hutchison Essar, India's fourth-largest cell phone group. Telecom Watchdog had, in a letter to MTN chairman Cyril Ramaphosa, raised the prospect of similar court action over any Bharti-MTN tie-up.

It said: "In case of a merger we have apprehensions of a possible breach of Indian regulatory norms related to foreign investment. In case of any regulatory breach, we will not hesitate in going to the Indian courts for a legal recourse to stop any illegalities."

Meanwhile, India's Business Standard newspaper last week quoted unidentified sources as saying Bharti and its partner Singapore Telecommunications would avoid the legal hurdle by forming an SPV that would acquire MTN in a cash and stock deal.

This would avoid offering MTN a stake directly in Bharti, which would effectively push foreign ownership in the Indian firm beyond the permitted limit under Indian laws.

The SPV, which would be a subsidiary of Bharti Telecom, would raise funds, including bridge loans, to fund the acquisition and would also explore the option of selling American depository receipts or global depository receipts to repay the bridge loan.

Both MTN and Bharti have refused to comment on the speculation about the deal, with MTN limiting its public comment to the cautionary published in SA on May 5, in which it merely confirmed the existence of "exploratory" talks with Bharti.

Business Day