Bharti's plans for taking over the South African telecom giant MTN has entered into a new phase. The Indian telecom major is looking to acquire 51 percent stake in MTN while MTN wants Bharti to buy out the entire company (100 percent stake). Sources say that Bharti has arranged funds for buying about 51 percent stake in MTN. Additionally, buying out 100 percent stake would mean merger through share-swap route which will be a very complex process.

 

According to reports at a price of 170 to 175 rand per share, the market value of MTN is around $45 billion. The price to earning ratio is 26 as against that of Bharti, whose ratio is 23. The net profit of MTN stands at $1.4 billion, which will not be enough to service the debt that is required to complete the deal. Hence, it is not possible to go through with the deal through purchasing the balance sheet of MTN.

 

Presently, Bharti has about $1.2 billion debt. It will need to raise another $10 to finance the 51 percent buyout. However, according to sources the 51 percent buyout would over-stretch its balance sheet. According to Broad-Based Black Economic Empowerment (B-BBEE) regulations, 20 percent of the ownership of a company operating in South Africa needs to be with the black people. But, for this the merged company needs to get itself listed in the South African stock market.

 

This essentially means that if Bharti is to swap with MTN shares, it will need to be listed in South African market. But listing of Bharti there would be a long drawn and time consuming process, which can easily take about three months. MTN's market cap is about $40 billion. Now, if 50% of paid up capital is merged with Bharti through the share-swap rule, the foreign holding in the company will cross the limit of FDI.

 

But, on the other hand a 51% buyout will save the Indian telecom giant a lot of problems. The challenge now remains as to how Bharti works out a possible structure, which would meet the regulations of both India and South Africa and creates a situation that would be a no lose scenario for the shareholders. According to sources, the merger could provide a good structure but clearing out the legal hurdles can be a bit of a problem. Bharti, in an issued statement earlier said that discussions are being held and are aimed at combining strengths of both the companies.