Bharti-MTN deal may be cash-heavy

The Bharti-MTN deal is likely to contain a significant cash component, according to a report by Morgan Stanley. An equity funding of $9 billion and debt funding of $16 billion could be a proposition, the report said after a conference call on Monday on the potential Bharti-MTN transaction.

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An all-stock deal can be ruled out due to exchange control restrictions on investors, it emerged from the conference call. Those on the call were Morgan Stanley analysts Sean Gardiner, Vinay Jaising and Chris Meyer.

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MTN is listed on the Johannesburg Stock Exchange (JSE) and, therefore, regulatory approvals could prolong the timetable for any deal, the analysts pointed out. Although delisting of MTN could be an option to skirt the regulatory hurdles, the Morgan Stanley report said that SA Reserve Bank and capital markets regulators would want MTN to retain a JSE listing in order to maintain the liquidity of the local stock market.

Bharti can buy up to 35% in MTN stock in the market without having to disclose any market transactions.

The report has stressed that it is safe to rule out a 100% acquisition and a majority stake is the most likely outcome. Since any deal would be subject to regulations by the Reserve Bank, stock exchange and the telecom regulator, a hostile deal is highly unlikely, according to Morgan Stanley.

Another significant point in the report is that "a stock issuance to the 23% management of MTN in the possible combined entity should not be ruled out since the Mikati family had earlier taken stock when they had sold Investcom to MTN."

The Mikati family and Newshelf through Alpine Trust own 23% in MTN. The Mikati family is learnt to be backing Bharti on the deal.

The analysts have put the worth of MTN at 180 to 191 ZAR (1 ZAR = Rs 5.51; 1$ = 7.64 ZAR) per share based on Bharti's enterprise value (EV)/EBIDTA.

And if Bharti was to acquire 50% in MTN at 191 ZAR per share, which is 20% higher than current prices, it may have to shell out $24 billion to $25 billion.

That would take Bharti's net debt to MCap from 3% now to 70%, and that's manageable, according to Morgan Stanley.

According to Morgan Stanley, Bharti would generate $3 billion of free cash per year during 2010-2012, which could be used to fund this transaction. Bharti recently raised $1.35 billion from international investors for a minority stake in its tower company, Bharti Infratel. And analysts believe that "Bharti could monetize its stake further". In fact, Bharti top executives had earlier said that the company would like to retain a minority stake in the tower subsidiary.

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Bharti chairman Sunil Mittal returned from London last Friday after "advanced negotiations" with Phuthuma Nhleko, the CEO of South African telecom major MTN. India's leading mobile phone operator Bharti Airtel wants to buy 50 to 51 per cent in MTN, for which Mittal and Nhleko were holding talks in London.

So far both the companies have maintained that they are engaged in exploratory talks, but it is believed that Bharti is well on its way for the mega deal.

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