NEW DELHI/JOHANNESBURG Talks between Bharti Airtel and MTN Group to create the world's third-largest mobile operator collapsed for the second time in just over a year on Wednesday over South Africa's reluctance to allow a flagship corporate to lose its national character.
Bharti, India's largest mobile operator, blamed the South African government for the breakdown in the planned $24 billion deal which faced close scrutiny from regulators and politicians. The transaction could have led to a full-blown merger.
South Africa was eager to retain MTN's local management and homegrown character and had approached Indian authorities to consider a dual-listed entity, a structure Indian law does not allow.
"We hope the South African government will review its position in the future and allow both companies an opportunity to re-engage," Bharti said, adding it would continue to explore international expansion opportunities.
MTN said in a statement that the two groups were not able to conclude a deal within the economic, legal and regulatory framework in which both operated.
Shares in MTN, Africa's biggest mobile operator by subscribers with a market value of about $31 billion, fell as much as 3.5 percent to 119 rand after the news.
The rand fell as much as 2.56 percent to 7.62 against the dollar, according to Reuters data. Possible foreign exchange inflows to South Africa from the deal had helped push the rand more than 20 percent firmer against the dollar so far this year.
Ahead of the news, shares in Bharti closed 0.1 percent lower in a market that rose 1.6 percent.
South Africa's National Treasury said the transaction required exchange control and other approvals but added that it and India's Finance Ministry were committed to working together to lay the basis to develop mechanisms for future mergers.
"In principle, the South African government is supportive of local companies that want to grow and diversify offshore from a domestic base," the Treasury said.
NO UNDUE INFLUENCE ON S.AFRICA
Analysts said they did not see undue influence on the South African government from its labor and communist allies to halt the proposed MTN-Bharti deal.
"We stand by our previous view that there has not been any undue influence from the left around this deal and the government's demands were not unreasonable given Bharti did not propose to have majority ownership," said Peter Attard-Montalto, Emerging Markets Economist at Nomura International in London.
South Africa's labor federation COSATU has said it would examine the deal to ensure workers interests were protected, while sources have said it was trying to halt the deal.
Bharti and MTN revived talks in May, a year after previous negotiations broke down over who would control the resulting emerging markets giant with more than 200 million customers across India, Africa and the Middle East.
Under the initial terms outlined in May, MTN and its shareholders would take a 36 percent economic interest in Bharti which end up with 49 percent of MTN.
The deal would have given both exposure to new markets ripe for growth, while a full merger, the eventual aim of the talks, would yield cost savings, allow for technology sharing, and provide financial muscle for more expansion, analysts say.
Bharti may now have to look at other markets.
"Bharti wanted to expand their footprint globally, but that just doesn't seem to be happening right now. But this is not the end of the story. They probably have to look at something smaller than MTN or some other region to enter," said Deven Choksey, Chief Executive of K.R. Choksey Shares and Securities in Mumbai.
A combined entity would have been the third-biggest mobile operator based on subscribers, behind China Mobile and Vodafone , although its annual sales of $20 billion would be dwarfed by China Mobile's $60 billion and Vodafone's $65 billion.
Bharti had increased the cash component of its offer for a 49 percent stake in MTN to $10 billion from a proposed $7.6 billion, two people familiar with the matter had said.
On top of that, the Indian firm was paying $4 billion in stock for a total package of $14 billion, 7 percent more than an estimated $13 billion proposed initially.
India's capital markets regulator last week altered the country's takeover rules, requiring a company that acquired 15 percent of an Indian firm through American depositary receipts (ADRs) or Global Depositary Receipts (GDRs) with voting rights to make a mandatory offer for a further 20 percent.
Standard Chartered and Barclays was advising Bharti Airtel, while Bank of America Merrill Lynch and Deutsche Bank were advising MTN.
For more on future possible scenarios click on (Additional reporting by Ed Cropley, Phumza Macanda, Tiisetso Motsoeneng and Serena Chaudhry in Johannesburg; Pratish Narayanan, Prashant Mehra and Aniruddha Basu in Mumbai, Writing by Marius Bosch; Editing by David Cowell)