Mergers & Acquisitions

Bharti Airtel Ltd. Vs MTN.

Deal Stages

Around 2006, MTN approached Bharti for M&A deal- Bharti was not having enough scale.

February 2008 – Talks for the Merger began. 07th March 2008 – Prices were discussed.( at above 160 rand per share) 5th May 2008 – Bharti-MTN confirmed the exploratory talks of M&A Bharti made an indicative offer : a $19 billion bid for 51% of MTN. 6th May 2008 - Bharti bid for $22 per share. 16th May 2008 – Term Sheet was prepared by Bharti and presented to MTN. 22nd May 2008 – MTN came with a fresh proposal which was not accepted by

Bharti.( Bharti to be subisidiary of MTN and wanted Singtel’s shares in exchange, also that

Bharti family to exchange their majority holdings) 24th May 2008 – Bharti Airtel pulls out of talks. ( Bharti’s Board was supposed to

meet in London)

Valuation and Swap Ration

Stage-I: Expectations MTN wanted 50 Cash :50 Share ( Proposed Buy by Bharti- 51% Stake in MTN) while Bharti was ready for 30 cash: 70 Share Stage-II: Interim Discussions ( both tried to agree): 60 Cash: 40 Share Stage- III: Final decision ( official announcements)

50 Cash :50 Share

Profits/ EBITDA:

Bharti’s profitability had grown in net profits by around 51% during 2005-06 and by 46% during 2004-05 Valuation: Readiness of Bharti:

Firstly Bharti wanted to pay 160 Rand ( around 21.25 US $) per share, then 165 Rand( around 22 US $) per share) to purchase $ 19 Billion ( for 51% Stake) - Not appealing as MTN was already trading at 160 Rand

- Was bigger deal for India as Tata- Corus deal was for $ 11.30 Billion.

Bharti- March, 2008 2.8$ Billion

MTN - 2007 4.5 $ Billion

Valuation and Swap Ration

Bharti might have valued based on the Key Industry Measure i.e. Revenue per User. ( wanted to implement the Low Cost Model in MTN territories also)

Expectations of MTN:

MTN expected 180 Rand per share ( around 24 $) from the M&A Deal.

Bharti 8.8 $ per user

MTN

Congo- Brazzaville 24 $ per user

Sudan 8 $ per user

Funding Arrangement- Bharti

Basic plan was to go with Debt and internal accruals. ( afterwards when decided for merger- no option but equity also( non cash portion))

Bharti had got letters of funding from a dozen US and European Banks for $60 billion.

SBI and ICICI Banks were contacted for Bridge loans.

Even West Asian Wealth funds- Committed money for the deal.

Market Responses

Pre-Deal Talk ( Before 4-5-2008)• Announcement- Lot of fear : Leveraging the Balance Sheet Substantially and Huge Equity

Dilution for Bharti.• Market Capitalization and Share Price Analysis during the deal talks:

• With in a week MTN Become more stronger/ valuable than Bharti.

Post- Deal Talk( after 25-5-2008)• Post the deal talk there happened nothing as the fear was prevailing and market took its

charge over the stock price as well as the capitalization.

  Market Capitalization Market Price( closing)

Date Bharti MTN Gap Bharti MTN

05/05/2008 41.8$ Billion 36.8$ Billion 5 $ Billion Rs. 893.85 12.8 Euro

           

12/05/2008 37.96$ Billion 38.3$ Billion (0.34 )$ Billion Rs. 838 13.3 Euro

Regulatory Requirements

Indian Environment:

-FDI Policy:

Major hurdle on FDI Front: Max 74% is allowed in the Telecom sector while already there was good amount of foreign holding in Bharti.( by SingTel, Vodafone and others), BOD of Bharti was giving saying to MTN that they will have the sectoral cap waived but independent study of MTN Board did not satisfied them.

Share holding of Bharti was as under:

`

Party % of holding

SingTel 15.58

Bharti Telecom 45.31

Vodafone 4.40

FIIs and Public 34.71

Total 100.00

Regulatory Requirements

- Antitrust Laws of India (Competition Commission of India)- Specific to Telecom Sector ( max 210 days time for approval by CCI)

This issue might have required consideration had the deal been successful.- Indian Companies Act Provisions.- Income Tax Act Provisions.

• South African Environment:FDI caps in SA:-These would have been relevant if Bharti would not have opted for Merger.B-BBEE (Broad Based Black Economic Empowerment )- One of the crucial organisation in South

Africa- For protecting the interest of Black Investors.-This would have been another issue to be resolved for Bahrti to merge as these regulations

provide for a minimum of 20% of merged entity’s shareholding should be with black investors. While Bharti was proposing for cash and share both to be offered for this merger which might have lowered the statutory requirements.

Shareholding of MTN:- Largest was Alpin Trust comprising of

a. MTN Management and Staff;b. A private Family

- 13.5% by South African Government Pension Fund.

Regulatory Requirements

South African Exchange Rules ( Iike India SEBI for Listed Companies)- Bharti might have been required to get listed on SA’s Stock Exchange to offer

shares to SA investors ( indian company can’t issue shares directly to SA invester ( foreign investor) but only by GDRs)

- As per above regulations, Bharti would have been required to make an open offer if it had picked up 35 % of the total stock of MTN ( in case it would have gone for 51% stake acquisition)

- Further, a partial offer was also possible if Bharti had the support of 50% of Shareholders ( plus one shareholder) to waive above mandatory offer.

Anti- Trust Laws:- These are not as complicated as in India;

There is small, intermediate and large merger conceptThere are so many exemptions at the outsetThere are so may heplines ( formal and non-formal from CCSA itself) which are cheap as compared to non-existence in CCI regime.Generally small mergers do not take time at all, intermediate will take time of 20 days from submission of completed application and 40 days for big mergers.

- However, compliance was necessary in case of successful deal.

Deal Structuring

Major problem

At the outset, MTN was not ready to enter into the exclusivity agreement with Bharti.

There might have been issue for who will become the Chairman of the new entity as MTN was not ready to go away with Management control and Mittal group was interested in control.

Mergers & Acquisitions

Reliance Vs MTN

Reliance Communication

Reliance Communications Limited founded by the late Shri Dhirubhai H Ambani (1932-2002) is the flagship company of the Reliance Anil Dhirubhai Ambani Group.

The Reliance Anil Dhirubhai Ambani Group currently has net worth in excess of Rs. 55,000 crore (US$ 14 billion), cash flows of Rs.11,000 crore (US$ 2.8 billion), net profit of Rs. 7,700 crore (US$ 1.9 billion) and zero net debt.

Rated among "Asia's Top 5 Most Valuable Telecom Companies", Reliance Communications is India's foremost and truly integrated telecommunications service provider. The company, with a customer base of over 48 million including over 1.5 million individual overseas retail customers, ranks among the Top 10 Asian Telecom companies by number of customers.

Reliance Communications corporate clientele includes 1,850 Indian and multinational corporations, and over 250 global carriers.

Deal Structure

A broad framework for a deal appears to be firming up, where MTN would take up to 74 percent in Reliance Communications and Reliance Chairman Anil Ambani could swap between 43 and 63 percent of his holding, depending on the success of an open offer, to become the biggest shareholder in MTN.

India allows foreigners to own up to 74 percent of a telecom firm. A purchase of 15 percent of a firm would trigger a mandatory open offer for another 20 percent

Under South African regulations, a company can buy up to 35 percent without having to make an open offer for more shares.

Morgan Stanley has estimated an open offer for Reliance Communications shareholders could be at 613 rupees per share, a 7 percent premium to the stock's closing price on May 23,

Under the new proposed structure, a special-purpose vehicle controlled by Ambani – with co- investment from global private equity and Middle East sovereign wealth funds – would own 51% of MTN.

.

Deal Structure

In the initial deal, MTN would take over Reliance Communications, India’s second biggest telecommunications company, while Ambani would swap most of his 66% stake in Reliance Communications for shares in MTN.

Under South African stock-exchange regulations, an offer that is for as much as 35% of a company triggers rules stating that the buyer of the South African company must extend the offer to other shareholders. In order to not trigger that rule, Ambani intends to keep his holding below 35%

At the same time, under the planned share swap, MTN is set to pick up a large portion of Ambani’s holding in Reliance Communications–40% to 44%

Under Indian rules, this will in turn trigger a second offer to other shareholders of Reliance Communications. Under that scenario, MTN could acquire as much as 20% more of Reliance’s shares.

Synergies in RELIANCE MTN Deal/ Reliance Motive

MTN Group is a South Africa-based multinational mobile telecommunications company, operating in many African and Middle Eastern countries.

MTN has about 68 million subscribers MTN acquired Investcom, thereby expanding to ten more countries, mainly under

the Areeba and Spacetel brands MTN describes itself as "the leader in telecommunications in Africa and the Middle

East" and as of early 2007 is active in 21 countries. (Since 2004, Africa has been the fastest growing mobile phone market in the world.

The deal will help Ambani own up to 34.99 per cent stake in MTN to avoid a tender offer under South African rules. It will also enable one of the MTN promoters to buy stake in RComm as part of the reverse merger process.

a deal going through would create a telecom giant well in excess of $65-billion in revenues with 120 million subscribers

Why Did The Deal Fail?

• Legal and regulatory issues led to ending of the merger negotiations between MTN and Reliance Communication Ltd• Anil Ambani had planned to swap his controlling stake in Reliance Communication Ltd with MTN in return for a significant stake in MTN. By this arrangement Reliance Communications would become the subsidiary of MTN, but Anil Ambani would have a controlling stake in the combined entity• This negotiation, however, ran into legal threats from Reliance Industries (RIL), which claimed that it had the right of first refusal to buy stake in Reliance Communications (RComm) and will block any such deal which doesn’t give it a first chance to buy a stake in RComm• The genesis of this dispute lay in an agreement which Mukesh & Anil Ambani signed at the time of the split of the main company Reliance Industries between them in 2006. Anil Ambani won the control of RComm. However, Mukesh Ambani claimed that a right of first refusal was contained in an agreement signed by two parties just before RComm was carved out of RIL

• RIL notified Anil Dhirubhai Ambani Group and the MTN Group of the stipulations contained in the agreement• RIL & RComm failed to settle this dispute •To get past this legal issue, Anil Ambani was planning to acquire a significant equity stake directly in MTN• This structure would not have worked with MTN as MTN would have wanted RComm to be the subsidiary of MTN which necessarily required the RComm shares to be acquired – which was blocked by RIL• Since RIL and RComm failed to resolve the dispute – MTN withdrew from the deal