THE LINE GOES DEAD: DUAL LISTING DASHES MITTAL’S HOPE

THE DEAL IS DEAD. LONG LIVE THE DREAM South African nationalism and India's hesitation on capital account convertibility scupper the creation of a giant MNC from the emerging markets    INDIA'S telecom czar Sunil Mittal's dreams of forging a transnational alliance with Africa's largest telco MTN were shattered for the second time in less than two years with Bharti Airtel and the South African company calling off talks a few hours before the expiry of the September 30 deadline after the South African government refused to soften its stance on the proposed deal structure.      "Bharti and MTN have decided to disengage from their discussions when the exclusivity period ends on September 30 2009. This (deal) structure needed an approval from the government of South Africa, which has expressed its inability to accept it in the current form. In view of this, both companies have taken a decision to disengage from discussion," Bharti Airtel said in a statement on Wednesday evening. ET NOW this paper's television channel, was the first to break the story at 7.25 pm, even ahead of the official statement from Bharti.      The statement was issued in India even as the top management team of Bharti — chairman Sunil Mittal along with top executives Manoj Kohli and Akhil Gupta — was at an offsite in Thailand. The deal fell through, say sources, after two crucial meetings in South Africa on Wednesday — in one of these, the key representatives of the government expressed reservations about the deal and refused to budge from its earlier stance on dual listing of companies or DLC. Thereafter, the MTN board met and formally called off the deal.      The announcement pulled down MTN's shares by 5.5% on the Johannesburg Stock Exchange (JSE) before the South African company requested a suspension of trade in the stock for the rest of the day. "The JSE has been requested by MTN to suspend trading in its securities until the commencement of business on Thursday, October 1, 2009," the JSE said in a statement.      Codenamed 'Project Green' by Bharti Airtel and 'Project Saffron' by MTN, the two companies and their numerous advisors and bankers had worked on the transaction since the beginning of the year. After over eight months of torturous and complex discussions, both companies reached an agreement for a $24-billion alliance to create the world's fourth largest telco spanning 24 countries and 200 million subscribers But the South African government's refusal to budge from its demand that the Indian government amend laws to allow dual-listed companies as a precursor to the deal sealed its fate      Dual listing allows companies to retain their separate legal identities and listings on stock exchanges while entering into "equalisation" agreements to collectively run operations and share profits or losses. Such arrangements are also seen protecting the national identities of companies. ET was the first paper to flag off the issue of dual listing as a major stumbling block for the deal in its edition dated July 31, 2009. Bharti has not given up yet  INthe end, the politics of national pride derailed the deal as South Africa did not want MTN to lose its independent identity. It wanted an assurance from the Indian government that it would amend laws to allow DLCs. While Prime Minister Manmohan Singh assured South African President Jacob Zuma that the Indian government would discuss all issues, this was evidently not enough for the South Africans. This also marks the seventh attempt by MTN to enter into a merger or strategic alliance with global communication majors. The South African giant has in the past been in failed discussions with the likes of Vodafone, China Mobile and Reliance Communications. Pallavi Ambekar, analyst, Coronation Fund Managers, Cape Town, a shareholder in MTN, is relieved that the deal has been called off. "We are shareholders of MTN and we are quite positive that the deal has been called off. We felt that the deal in its initial format was quite complicated and felt that the price being offered undervalued MTN itself. I can't comment on any new deal because we haven't seen any new deal that was being presented. The deal was complicated. Several things would have come in the way of actually concluding the deal, not necessarily just the SA government," she said in an exclusive chat with ET NOW soon after the Bharti statement. Naturally, friends and well-wishers of Sunil Mittal are disappointed. Dabur India chairman Anand Burman, Mr Mittal's close friend for over 20 years, castigated government officials for derailing what would have been the country's largest cross-border deal. "It is a bit of a setback for Sunil. But he's a gogetter. He will go for something bigger than MTN. It's rather sad that India's best company with the largest number of subscribers and the pioneer of the low-cost business model had to fall prey to the technicalities of some government babus somewhere," Mr Burman said.      Ironically, the transaction under discussion did not involve any loss of national identity for MTN. It was a cash-cum-stock deal which would have resulted in Bharti Airtel getting a 49% stake in MTN and the South African telco and its shareholders getting a 36% economic interest in Bharti. But the South Africans wanted assurances for the future, which the Indian government was not in a position to give as it said that allowing dual listing will need major amendments to key corporate laws and cannot be done in haste. Finance ministry officials had earlier told ET that DLCs do not figure anywhere on the government and RBI's radar at the moment because that implied a situation close to full capital account convertibility, which the Indian government and RBI were unwilling to consider. Following Bharti's statement, the South African government said: "When companies structure their relationships outside the current exchange control regulatory framework for such transactions, they require the approval of the minister of finance. This was the case with the proposed MTN-Bharti merger, which required certain exchange control and other approvals." Despite the South African government's failure to approve the deal, Bharti Airtel defended the proposed deal structure and said that 'the broad structure being discussed by the two sides had taken into account the sensibilities and sensitivities of both companies and both their countries'.      The Indian telco also said that since both companies were the national champions in their respective countries, the proposed deal structure had taken into account their leadership in their respective geographies to ensure continuity of business — including listing, tax residencies, management, brand etc. "This transaction would have been the single largest foreign direct investment into South Africa and one of the largest outbound FDIs from India. The deal would have been a significant step in promoting South-South cooperation — a vision of the two countries," Bharti Airtel's statement added. But the Indian company has not totally given up, if its statement has is anything to go by. "We hope the South African government will review its position in the future and allow both companies an opportunity to re-engage." Bharti Airtel also added that it would 'continue to explore international expansion opportunities that are consistent with its vision and bring value to its shareholders'. The Indian telco even politely observed that it "enjoyed its engagement with the MTN management and its board and wished them continued success."      Last month, Bharti Group chairman Sunil Mittal told ET NOW that the company's second attempt to forge an alliance with MTN was a well thought out move. "I would not call it an audacious move. This is our second attempt at forging a deep and meaningful alliance with MTN. It is a very well considered move and there is a very strong rationale. Our business model is ready to go out and that's why I am exploring the MTN opportunity." Over the past month, Mr Mittal had aggressively wooed the Indian political establishment to help Bharti clinch the deal.      The Bharti Group head had met the prime minister three times and held discussions with with finance minister Pranab Mukherjee as well as top government officials in a number of ministries. Bharti also indicated its gratitude to the Indian government for its support: "Bharti is grateful to the various Indian government authorities, in particular the minister of finance, the minister of commerce and industry and the minister of corporate affairs. We express our profound gratitude to the honourable prime minister of India for his strong support to what could have been a transformational partnership."