Bharti-Airtel and South Africa's largest mobile operator MTN are talking for a strategic partnership, which will see Bharti acquire a 49 per cent shareholding in MTN, which along with its shareholders would acquire an approximate 36 per cent "economic interest" in Bharti.

What does it mean for Bharti to move beyond the Indian market? Does the African market represent a huge potential? And finally what kind of legal hurdles or challenges will this deal have to face?

Rajya Sabha MP, Rajeev Chandrasekhar, the founder, BPL Mobile, told CNBC-TV18 that it was an excellent move "and if Bharti intends to move to number two or three position, it needs take a leap as big as this,'' Chandrasekhar said.

According to Abizer Diwanji, head, financial services, KPMG, ''The deal is innovatively structured," a view reiterated by Vivek Gupta from chartered acountancy firm BMR Associates, who, going by the text of the Bharti press release, says, " The overall deal would be predicated to a large extent upon the ability in not having to do a public offer in India."

CNBC-TV18 shares with domain-b its excluisive interview with Chndrasekhar and Diwanji

Sunil Mittal has put in the press release as a great South-South deal. What do you think it means for an Indian telecommunications company to go out there and try and cash in on African growth. Do you think there are is much growth to be had? Do you think there is that much strategic value to this deal?
Rajeev Chandrasekhar: Prima facie, from what I see, this is an excellent deal because if we look at it from Airtel's point of view, growth in India is bound to taper off over the next few years and if they really want to make a strategic jump into the big three and go from number five or six they are today as a franchise and move to being the third or second largest operator in the world, they need to do something like this.

And if you step back and look at markets where growth is going to come in the future, the parts of Africa where MTN is, is clearly the growth market. So, I see this as a very good strategic move for Bharti and its shareholders. 

Bharti in its press release calls it as underpenetrated markets in Africa. But many other telecom veterans are telling me there is already a considerable penetration that has taken place in the African markets, and the combined Bharti-MTN will rank in the top 5 telecom companies by size in the world. Do you think this allows them to go after other emerging markets in the world with combined strength? Are there any other markets in the world that would have space for new players?
Chandrasekhar: The most underpenetrated markets in the world today are the African markets. One should ignore skeptics because they were the same kind of people who looked at India 10 years ago and said look the Indian market would never be this big.

The argument for mobile telephony today, is under penetration of telephony and that is what has played itself out very successfully in India, China and other emerging markets. In my opinion, this will play itself out in Africa as well.

So, if you put yourself in Bharti's shoes and say where the growth markets outside of India are, the next ones are in Africa. 

What do you think of the deal and the way it is structured?
Abizer Diwanji: It's innovatively structured and it's very obvious from the press release that both are getting a majority stake.

The interesting part in this deal is how is each party going to fund the open offers. As far as I know and my knowledge is limited, the African market requires an open offer at 35 per cent.

The Indian market requires an open offer of a 20-per cent stake. So ideally, both MTN as well as Bharti will have to make respective offers in the countries and if they do that, the shareholding structures will change thereafter.

But my own estimate is Bharti would need approximately $4 billion totally to fund this deal and MTN will need an additional $5 billion to fund the open offer.

Do you think there will be a case made for an open offer since in both cases the limits have been triggered?
Vivek Gupta: I would like to read each word of this release very carefully. They don't call it shareholding and I believe that has an implication. So, the overall deal would be predicated to a large extent upon the ability in not having to do a public offer in India.

The way I read the press release it suggests to me that they are not intending to do a public offer. They seemed to have somewhere slipped in the deal that will happen through a comprehensive scheme of arrangement, which would be present to the relevant court under section code 391-394 of the Companies Act.

This means that each will enjoy the immunity despite triggering the takeover limit. It will enjoy the immunity under the code for public offers in cases where public offers would be triggered due to transactions occurring as part of arrangements and schemes of arrangements.

So that's how you think MTN will avoid an open offer for Bharti? Having acquired more than 15 per cent of Bharti, how will Bharti avoid an open offer for MTN?
Gupta: I don't know the African leg of this structure, but if Bharti would have to do an open offer in Africa with 35 per cent trigger limit then it would have gotten factored in the press release in some way. So perhaps they have come up with some innovative way to avoid similar open offer in Africa.

I read the press release because with $4.1 billion of cash outlay that it seemed to indicate for Bharti pre-supposes there is no open offer. The $4.1 billion of cash outlay is based on the transaction structure put without any leakage scope for an open offer. The other point, which I am not sure is why Bharti is acquiring 49 per cent. That's because Bharti under the telecom laws couldn't acquire a majority stake in the entity there.

Is that because that would impact the licenses that MTN has? What do you read in the words economic interest being used here in the press release when it comes to the stake that MTN will hold in Bharti?
Gupta: This is pure conjecture. The way I read it is as follows: what will happen is Bharti has clearly disclosed in the press release that they will be consolidating with MTN in their financial statements, which means that even if it doesn't reach the 51 per cent limit from an accounting perspective they will consolidate on the basis of a governance structure or board control.

When they do that, MTN under the Indian law will become the subsidiary of Bharti. So potentially, the way they are structuring the transaction is that MTN is a subsidiary of Bharti and then the shares that MTN will hold in Bharti will not enjoy any voting right under the Indian corporate law.

So that's one reason why they have used "economic interest" because the subsidiary cannot hold shares of the parent company itself. So you agree that Bharti will end up paying $4.1 billion and giving about 36-per cent stake in Bharti and in return get 49 per cent stake in MTN. Do you think this is too much of a dilution?
Diwanji: The relative valuations prove it. If you look at the market cap of Bharti and MTN, it's $34 billion for Bharti and roughly $24-25 billion for MTN. So even if you look at it on pure commercial transactions leaving aside all the razzmatazz flowing through it, in my opinion the numbers justify it.

The only interesting thought about the numbers is that while MTN is paying for Bharti, Bharti is compensating the shareholders for MTN directly. So in a way there is a secondary leg that Bharti is doing and a primary leg that MTN was doing which is quite interesting.

Gupta: I agree with Diwanji on dilution. So Bharti is giving up 36 per cet and $4.1 billion cash net and it's getting 49 per cent of a controlled asset in Africa with a certain size. If one views this transaction from any valuations basis, this seems reasonable.

What do you think of the price that Bharti will end up paying for MTN? Do you think that this under penetration in Africa is worth this 36 per cent of stake of Bharti plus about $4 billion?
Chandrasekhar: I don't know the numbers and I don't want to comment on them. But I think it is difficult to argue with the commercial logic of something like this, which creates an entity in the top 3-4 in the world, serving the markets that are the fastest growing in the world. I believe these will be value accretive to shareholders.

Are we looking at a merger in the next year or two? Will that be too complicated because we already touched upon the point that so many of the telecom licenses within MTN are held in different companies and change of ownership in licenses is always a sticky issue everywhere including in India?
Diwanji: If there are regulatory issues around transferring of licenses then a merger would not happen and at the end of the day, effective control is achieved through management control. And given the different geographies that Bharti and MTN are in, a merger may make a little sense and operating synergies may still be based without a merger.

So you are saying there is no case to be made for a potential merger a few months down the line?
Diwanji: Yes, maybe. It depends on the regulatory rules and that's the main concern.

Would you agree with that?
Gupta: The press release somewhere talks about intent to merge in future but I agree with Diwanji that regulatory hurdles would be a key hurdle. So, I think they are doing the transaction this way to provide a platform where effective combinations happen today and then they will explore ways and means to combine the entities if they can for regulatory standpoint at a later date.

They aren't losing much because they are already able to consolidate accounts. Bharti is able to do that and are you losing anything by not having immediately going through that merger route?
Gupta: A consolidated entity would definitely be advantageous in the sense that the shareholders of both companies would come in at one level. So, there is no divergence of interest at all. What is good for Bharti is good for MTN shareholders and what is good for MTN is good for Bharti shareholders.

MTN shareholders get a 25-per cent right through MTN and another 11 in Bharti separately. Bharti shareholders continue to hold 64 per cent of Bharti and then they get to hold through Bharti a 49-per cent interest in MTN. We are operating in a scenario, which is a heavily regulated market across geographies. So, I can fully understand that at this point in time one has been able to achieve from a financial point of view. And from a control point of view, I think that's a great achievement.

Any other challenges you see since you have been familiar with this transaction earlier on?
Diwanji: If at all there is an open offer, the arrangement of capital the press release keeps on emphasising the fact that Singtel as well as Standard Chartered are well behind this transaction. Funding this transaction if at all if there is an open offer, the situation is difficult.

Since the foreign direct investment policy changes occurred, this is the first humongous benefit of this new policy. So Bharti is the biggest beneficiary, would you agree?
Diwanji: Yes, there is certainly a benefit to that.

(See: Bharti Airtel press release)