And there weren't any greenfield licences of substance available, except for south east Asia. The board felt there was only one big opportunity that could “move the needle” for MTN's future — India.
Nhleko got to work immediately. He started courting the Indians, but not just anyone. He wanted to be in bed with either the number one or two telecom company (Bharti Airtel or Reliance Communications). The result: MTN would become the third-biggest telecom giant after leaders Vodafone and British Telecoms.
Nhleko managed to strike up strong relationships with both Bharti chair Sunil Mittal and Reliance boss Anil Ambani. His charm offensive worked well: last year, within a few months, Bharti put an offer on the table for a full merger. But the deal failed because of pricing, structure and regulatory issues.
Reliance Communications was waiting in the wings and MTN was wanting a stake in the telecom giant. But the deal ended dramatically when Ambani and his billionaire brother Mukesh got embroiled in a bitter feud over control of the Indian company.
Still, Nhleko remained friends with Bharti. He was on the phone to Mittal or visiting India. A year later, Bharti was officially back on the SA scene.
But Bharti's bigger, sweeter offer (R200bn) didn't go down well with the SA market and government adopted a wait-and-see approach. On the surface, it appeared Nhleko was handing over one of SA's prized assets on a silver platter — a 49% stake in MTN, in a cross-holding deal that amounted to ceding control.
But things were a lot more complicated. Behind the scenes, while the pricing and structure were repeatedly tweaked, Nhleko and the board had a crafty plan. It wouldn't be immediate, but MTN was eventually gunning for majority ownership of its Indian counterpart. In the first phase of the transaction, MTN would have been only the second-largest shareholder in Bharti with a 25% stake. Independent Singaporean investor Singtel already owns about 30%.
MTN and Singtel could have formed a powerful force with 55% of the largest telecom player in India — a force that would eventually have taken control of Bharti. It's hard to see this through the haze of regulatory hurdles and the secrecy, but that was the ultimate prize for Nhleko, say sources.
Nhleko is said to be a keen dealmaker and risk-taker and obsessed with mergers and acquisitions. The Bharti deal would have been the final coup in his acquisitive trail through Africa and the Middle East — his contract with MTN ends next year. But with the Indian deal having fallen apart and not many greenfield opportunities for MTN elsewhere, it could be a long wait before Nhleko can do another big deal. So is it time to move on to more exciting things?
“It may very well be,” he told the FM in an exclusive interview this week. “Early next year the board and I will go back to the drawing board.”
Nhleko is adamant he did not want the deal for personal glory or gain. He already has more than 6m shares in the R236bn telecom giant, worth about R760m, as well as 436000 share options worth about R23m.
According to merchant bankers advising on the deal, Bharti had added a 35% premium on what the MTN share price was at the beginning of May. But Nhleko says: “The issue is what the board perceives to be in the long-term interests of the company — one of growth. I don't make decisions unilaterally. I'm not that persuasive. We wanted to be a growth stock, and in markets with low penetration and growth. India was the answer.”
What's so special about India? It's the biggest low-penetration market (about 30%); it doesn't yet have 3G (MTN has the technology); and its growth projections are impressive. The only comparable market is China, but there are no opportunities there for acquisitions or mergers.
MTN's rationale for the deal was based on three fundamental issues: diversification; growth; and economies of scale, which matters when tariffs fall and regulatory costs increase. The only way MTN can achieve economies of scale and maintain margins over time is through a low cost base — but that would have required a full merger with Bharti.
“Unfortunately we couldn't do that in phase one because of the many regulatory and complex political issues, so we looked at a two-stage process which started with a cross-shareholding structure,” explains Nhleko.
With the proposed deal Bharti would have paid about R80bn in cash for its 49% of MTN, while MTN would have got 25% in the partially merged entity. Once there was a cross-holding, both companies would exploit markets for mutual benefit. MTN would drive growth and expansion in Africa and the Middle East, and Bharti in Asia. Says Nhleko: “In three to four years, the (global) winners and survivors and dominant players will be the ones that have scale. If you're buying a billion dollars of equipment, it means one thing. If you're buying three or four billion, it means something else.”
Both parties wanted to retain their national character. Nhleko insists the “DNA of the company would not have changed”.
“Essentially, you'd have significant exposure in southeast Asia, as well as a far larger and diversified board that reflected the various stakeholders and the company's footprint.”
MTN would remain listed in SA and managed by South Africans. The tax base would remain in SA. Because of the huge net inflow of the deal, it would be many years before there would be any meaningful outflow from dividends to Bharti.
Existing shareholders would have effectively retained 64% in MTN (the current 51%, plus MTN's 25% of Bharti's 49% stake). But then it gets complicated.
MTN's investors would have had 11% of Bharti through global depository receipts (GDRs), negotiable certificates that give ownership of a company's shares.
Take SA's Public Investment Corp (PIC) as an example. It has 24% of MTN. In the new partially merged entity, the PIC would have had about 12%, taking the rest in GDRs and cash to compensate for its diluted share.
The PIC was happy with this, but Coronation Fund Managers (one of MTN's top 15 shareholders with about R900m invested) strongly opposed it. Analyst Pallavi Ambekar felt “the price was not high enough and we were not happy with the settlement currency being the share portion of the parent”.
The GDRs were an attempt to bypass Indian regulations that would have triggered a mandatory bid for Bharti by MTN once they owned more than 15% of the stock. But the Indian stock exchange regulator extended the requirement to GDRs last Tuesday (6 October 2009): a clear indication that the Indian authorities were trying to protect their national interests.
In SA, GDRs are also new territory. Investors faced holding equity in the form of a GDR in a foreign entity that has a primary listing in India. Treasury also struggled with reconciling our laws with such a deal. The pricing, structure and terms of engagement were constantly being tweaked. But according to an adviser, Bharti was willing to drop the GDR option and offer cash instead.
It's still hard to see value or benefits for MTN investors. Nhleko says the devil was in the detail, but he believes that in the long term shareholders would have benefited from higher dividends. “Again, it's the growth, diversification and increased revenues we would have gleaned from a merger.”
MTN and Bharti are almost on a par in market cap, but MTN is a far better company in terms of revenues and reach (22 countries). It would have been in a position to acquire instead of being taken over.
“There are a lot of issues here. Clearly, Indian companies trade at high multiples compared with SA companies, because of the projected GDP growth in that country,” says Nhleko. “Taking a 49% stake would have increased our gearing (debt) and it would have been dilutive. So we came to 25% in terms of achieving some of our objectives. That is really the answer — there was nothing that precluded us going up to 49%.”
Putting together the complex structure required many lawyers, advisers and full time MTN staff. Merrill Lynch and Deutsche Bank advised MTN; Standard Chartered and Barclays in Mumbai, and Absa Capital in SA, acted for Bharti. The day after the deal collapsed, some of the lawyers and merchant bankers immediately went on holiday. The deal cost MTN thousands of hours and about R100m.
Was MTN ill-advised? The market certainly thought so. When the collapse of the deal was announced last Wednesday, the share prices of both companies rose. “Part of the problem with this kind of deal is you were seeing a lot of simple answers to very complicated issues, with a fraction of the information,” says Nhleko. “Because of this misunderstanding and confusion, some in the market didn't see the value.”
Why was the deal so complicated compared with previous global transactions? “It's the regulatory hurdles, in India and SA. If we wanted a full merger, to get the highest benefit of the synergies, the merged entity would have to be listed somewhere. SA has its own national interests in terms of not wanting to see SA companies have primary listings elsewhere. The Indians feel the same.”
A treasury source agrees: “If it was a UK company doing the deal, it would have been approved.” Nhleko adds: “You're dealing with two sovereign countries — emerging economies — so they have assets they need to protect and all this legislation to do that. We were trying to sort out our commercial strategic objectives while ensuring we were within that framework, but as you can imagine it's difficult to do.” So, what was the final deal-breaker?
“Based on the current structure, we couldn't conclude everything because of the regulatory challenges as well as some commercial and economic matters [such as the rand strengthening]. So we took a holistic view to stop the talks.”
It's known that national treasury struggled for months to get their heads around the structure of the proposed transaction. They even sent a team to India two weeks ago to explore Indian exchange controls and company laws. What they found were very restrictive and protectionist laws. SA's company law is a lot more sophisticated, says a treasury source.
The SA government favoured a dual listing, which MTN wasn't averse to, but Indian law didn't allow that. For the deal to have happened, India would have had to amend or create about 13 different pieces of legislation, taking 18-24 months.
Will the collapse sour “south-south” relations? The two companies feel “a lot of value will come out of it”. Finance minister Pravin Gordhan has left the door open for future talks by inviting his Indian counterpart Manmohan Singh to look at cross-shareholding and dual listing structures.
So where does that leave MTN? “We're not saying it's India or nothing. What we've said is, strategically we would look at India. If that doesn't work then we will have to review,” says Nhleko. “Naturally it has taken up a lot of my time, probably about 20%-30%. It's been quite an intense transaction. But it was not an exercise in futility. We definitely learnt from this experience. We understand the Indian market and regulations better, and we'll decide how best to proceed.”
Nhleko is known to forgo meat before a big venture and has said this week that he's been following a vegetarian diet up until September 30, the deadline for talks between MTN and Bharti. Maybe if he had more predatory instincts, he wouldn't be in this position.
Source: Financial Mail
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