India's Bharti Airtel Ltd. and South Africa's MTN Group Ltd. called off talks aimed at a $24 billion merger that would have created an emerging market telecom empire after the South African government balked at the structure of the proposed deal.
The collapse of the high-profile talks -- after months of negotiations and after commercial terms of the deal had been ironed out -- underscores how the interests of governments can supersede those of companies, especially when it comes to developing nations protecting their national champions.
European countries often have intervened to protect companies wrapped in national pride and the U.S. government has prevented cross-border deals in areas it deems sensitive on national security grounds.
Still, many global companies have been looking to emerging markets for new growth and the collapse of the proposed tie-up between Bharti and MTN could put a chill on those ambitions.
"Everybody is talking about building globally successful companies out of emerging markets and this would have been an amazing step in that direction," said Kunal Bajaj, managing director of telecom consulting firm BDA Connect in New Delhi.
The Bharti-MTN deal would have created a juggernaut with 200 million subscribers, the third-biggest wireless carrier after China Mobile Ltd. and the U.K.'s Vodafone Group PLC. Combined, Bharti and MTN have $20 billion in revenue.
But South Africa's Treasury, which must sign off on cross-border transactions, raised objections that the deal wouldn't preserve the national character of MTN, one of the country's largest wireless operators.
After a flurry of meetings last week in New Delhi, Indian officials proposed a compromise that would have the deal proceed in two stages: first, each company would take large financial stakes in the other, and later they would agree on how to fully merge while addressing South Africa's concerns.
But on Wednesday, the deadline for the companies to finalize an agreement, the South African government balked at the terms. The companies, which had twice extended the deadline for their exclusive talks, opted to end the discussions.
A spokesman for India's finance ministry declined comment. In a statement, the South African Treasury said: "In principle, the South African government is supportive of local companies that want to grow and diversify offshore from a domestic base." It added it sought to work with the Indian government to pave the way for the "expansion of companies in both countries."
The break-up is a major setback for Bharti, which is run by prominent Indian industrialist Sunil Bharti Mittal. The company is India's largest cellular provider, with 105 million subscribers, and is still adding millions of users each quarter.
But expansion abroad is one way for Bharti to hedge against the coming challenges at home: a shortage of radio spectrum that is hurting call quality and increased competition from low-priced start-ups.
"We hope the South African government will review its position in the future and allow both companies an opportunity to re-engage," Bharti said in a statement.
MTN, which operates in 21 countries in the Middle East and Africa, will also have to regroup strategically. This is the third failed attempt by MTN to combine with Indian cellular leaders.
Negotiations between Bharti and MTN over a possible merger first foundered in May 2008. MTN then opened talks with India's Reliance Communications Ltd., but those talks collapsed two months later.
Under the latest terms the companies had agreed to, Bharti was to take a 49% stake in MTN for roughly $14 billion in cash and stock, while MTN and its shareholders were to get a 36% interest in Bharti for about $10 billion in cash and shares. Eventually, the two companies would combine operations and merge.
But the South African government wanted the company to retain a South African identity after the deal and pressed for a structure called a "dual listing," people familiar with the discussions said. In such an arrangement, the companies would maintain two separate sets of shareholders but combine cash flows and operations.
Jigar Shah, senior vice president of Kim Eng Securities India Pvt. in Mumbai, said some Bharti investors may cheer the collapse of the deal, because they have viewed it as a distraction to management. Bharti "still has the resources to become global over time" he said. "Now they may not rush into that."
Nicolas Brulliard contributed to this article.
Write to Amol Sharma at amol.sharma@wsj.com and Eric Bellman at eric.bellman@wsj.com
Source : http://online.wsj.com/article/SB125431578653952371.html
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