Billionaire Sunil Mittal, the founder of Bharti Airtel, plans to set up a separate company in partnership with Singapore Telecommunications (SingTel) that will be the vehicle for acquisition of the South Africa-based MTN Group, according to sources close to the deal.
The special purpose vehicle will raise funds, including bridge loans. The company will later explore the option of selling American depository receipts or global depository receipts to repay the bridge loan, the sources said.
Indian firms, including Tata Steel, in the past have formed SPVs to acquire foreign companies to protect local operations and also to avoid legal hindrances. The SPV may be registered in a tax-haven country, like Mauritius or Bahamas, the sources said.
The move to float an SPV will help Bharti Airtel to continue being listed on Indian stock exchanges, while MTN's promoters will be given a stake in the SPV. The quantum of the stake will depend on the cash-share ratio, which is yet to be finalised between Bharti and MTN.
Bharti Airtel would raise funds by diluting the equity of the SPV and, if needed, the promoters' stake in Bharti and that of its partner SingTel to part-finance the deal.
Airtel may have to go for an open offer -- merger or acquisition of over 35 per cent stake triggers an open offer in South Africa -- and merge the companies' selected businesses into the SPV.
As the effective foreign direct investment in Bharti Airtel is about 68 per cent (It should not exceed the 74 per cent limit set by the government), MTN would not be offered a stake in it. However, in Bharti Telecom, the foreign holding is only 42.8 per cent -- SingTel holds 32.8 per cent, while Vodafone holds 10 per cent.
Thus, the SPV will be a subsidiary of Bharti Telecom and a stake in it will be offered to MTN promoters, said sources. Bharti Telecom owns a 45.31 per cent in Bharti Airtel, of which the Mittal family holds around 26 per cent. The MTN management holds over 13.3 per cent in MTN through Newshelf664.
Lebanon's Mikati family owns 9.8 per cent stake.
"In return for the equity given to Bharti, the promoters of MTN will get cash and stake in the SPV. The Indian telecom major will pay the cash for the stake held by public and financial institutions. Bharti Airtel is looking at raising a bridge loan of around $15 billion for the cash portion of the deal. The remaining amount will be raised through internal accruals and fresh issue of Bharti's and the SPV's shares," banking sources said.
To initiate the merger move, Bharti Airtel executives are expected to hold talks with financial institutions and foreign institutional investors, who hold stakes in MTN. The move is to win the confidence of investors in the wake of counter-takeover offers from other players, like UAE-based Etisalat.
When contacted, a Bharti Airtel spokesperson said: "We have already issued a statement and have nothing further to add to our last statement. "At this stage, MTN is not commenting further than the cautionary announcement released on May 5, 2008," an MTN spokesperson said.
Cost-sharing, co-branding, marketing, operations (existing and new), human resource sharing and employee relocation to other countries, among others, would also be conducted through the SPV. As equipment and software purchases are huge for telecom companies, the merger would give joint bargaining power to Bharti.
"The SPV would also look at listing on the New York Stock Exchange, where valuations of telecom companies are relatively higher," said a source.
The SPV would also be the vehicle for the Bharti Airtel-MTN combine's future acquisition plans in the US and Europe.