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Bharti's interest in South African operator, MTN, has been making telecom news. This is a developing story and we are sure that by the time this reaches you, the contours of the "deal" would have changed. We bring you an update of the developments as we go to press.

No deal has been announced yet. And both sides stress that talks are at an "early", "exploratory" stage. But as India's largest mobile phone company, Bharti Airtel, and South Africa's MTN, the largest mobile operator on the African continent, grapple with the details, industry attention remains riveted on what is potentially the biggest deal in telecom history yet.

As we go to press, the situation is still fluid and much could change when (and if) the buyout/merger/joint venture finally crystallises. For now, MTN has kept its options open. It is not in favour of signing an "exclusivity" contract with Bharti Airtel, under which it would be bound to forgo talks with competing bidders till the negotiations with Bharti are concluded. The other bidders include Etilsalat and China Mobile (see box).

Early May, a leading business daily reported that Bharti was in the running to pick up 51 per cent stake in MTN for 160 South African rand ($21.25) a share. This would amount to an investment of $19 billion for 51 per cent stake, the heftiest ever by an Indian firm for an acquisition. However, MTN reportedly wants a full takeover, thereby raising the asking price to much more than the $12 billion that Bharti had rustled up.

Looking at other funding options, the top management of Bharti Airtel, MTN and the Lebanon-based Mikati family (which holds 9.8 per cent in MTN) are exploring a 50-50 cash-and-stock option, in which Bharti would have to pay for 50 per cent of the deal through cash and the rest through equity in Bharti Airtel.

However, in a cash-equity swap of 50:50, Bharti would face regulatory issues in India for exceeding the FDI ceiling of 74 per cent. SingTel, Vodafone and others already has over 30 per cent stake (direct and indirect) in Bharti. Parting with 50 per cent in favour of MTN would take the total FDI to 86 per cent, thus breaching the cap.

According to industry sources, MTN, which is seeking a valuation of $50 billion for a complete takeover, is willing to discuss the management structure post takeover. Bharti Airtel has indicated that it is open to offering the chairman's position in the merged entity to MTN Group Chairman M.C. Ramaphosa. Sunil Mittal could be the deputy chairman and group CEO, and MTN Group CEO Phutomo Nhleko could settle for deputy group CEO. Ramaphosa is reportedly expected to meet regulators in South Africa as well as the Black Economic Empowerment Council, which has been pushing for a greater role for blacks in companies in the country, to explain the nature of the deal. MTN's management, which essentially comprises the black community, holds over 13.3 per cent in the company through Newshelf664.

Separately, some bankers associated with deals in the South African region observe that the Office of Foreign Assets Control, which is part of the Treasury Department in the US, has imposed comprehensive sanctions on some of the countries in which MTN operates, including Iran, Liberia and Syria. This might make it difficult for US bankers to fund the deal.

Meanwhile, negotiations on price, management and regulations are going on in full swing. While the exact details are not known as neither side is willing to talk, it is believed that Bharti is inching towards closing the deal. When –­ and if –­ it comes through, this would mark a major overseas success for Bharti. The company, valued at about $37 billion, has so far made modest international forays into countries such as Guernsey, Jersey and the Seychelles.

The South African acquisition would be a marriage among equals. MTN is only slightly bigger than Bharti. It has 68 million mobile subscribers to Bharti's 64 million. MTN has a broader geographical reach and higher profits –­ $4.5 billion before interest, taxes and depreciation in 2007 –­ compared to Bharti's $2.8 billion in the year ended March 2008. A combine would make it the sixth largest wireless operator in the world, with over 130 million subscribers in more than 20 countries.

It is a good time for Indian companies to look at global opportunities while M&As are cooling off elsewhere in the world, as S. Subramanian, head of investment banking at Enam Securities puts it. However, analysts believe an outright takeover may prove too expensive for Bharti at the moment. Harit Shah, research analyst, Angel Broking notes: "It doesn't look like Bharti is trying to take control; otherwise the company would have bid or come out with an open offer as per South African rules."

Bharti too has denied making any bid. In a recent press statement, the company noted: "The discussions being held are aimed at combining the strengths of the two leading players and, accordingly, veering towards possible structures to achieve this objective." Jan Meintjes, a fund manager who helps manage assets worth 2.3 billion rand ($301.2 million) at South Africa's Gryphon Asset Management, supports the statement. "The groups may be discussing a joint venture or a number of other cooperation agreement structures. Both sides will want something that will bring the best value to shareholders," he comments.

However, as is the case with most high profile acquisitions, speculation is rife on the Bharti-MTN deal. The Asian Wall Street Journal, quoting an unidentified source, wrote that Bharti was considering raising its offer to around 175 rand ($22.84) per share for control of MTN. According to the paper, an official bid was expected anytime soon.

Price apart, there are other concerns too. Analysts, for instance, question how Bharti would fund a deal that could top $20 billion if a bidding war breaks out? How would it integrate a similar-sized company and deal with regulators and customers in 21 countries? And, would Bharti not be distracted from its home market at a time when significant changes are underway?

"MTN is not a small company, and it's not a cheap acquisition," says Rishi Sahay, director, IndusView Advisors. "The synergies are difficult to value as they are different networks, different geographies, and they are nearly the same size. So, you may have to run it like two independent companies, and Mittal doesn't have much international experience."

Besides, there will be the whole question of merging two cultures, which won't be easy. Exporting a business culture to another firm is easier said than done. Sahay says there are not many examples of successful mega telecom deals. "Look at Sprint and Nextel," he says.

But analysts also agree that if Bharti wants to play in the big league, it has to gamble big. "Telecom is so regulated, there aren't many opportunities. So, you don't know when and where the next one will be," notes Sahay. There is no denying that in a few years, growth opportunities in the Indian market could dry up. Therefore, it increasingly makes sense for companies like Bharti to look overseas for expansion. On its part, Bharti would bring to the table a certain level of confidence and clout as a leader in an emerging market, with sustained profit margins (before interest, taxes and depreciation) of over 40 per cent, even as it offers calls for as little as Re 1 per minute.

"MTN's growth rate would be significantly lower than that of Bharti," says an analyst from KPMG. Consensus forecasts point to an annual growth of 16.7 per cent in MTN's operating profit over three years, compared to a compounded annual growth rate of 31.7 per cent for Bharti during the same period.

Bharti has also perfected the art of signing up subscribers cheaply and quickly. It has strong operations and processes, and makes money despite a low ARPU of Rs 357 (as on March 2008). That could be an opportunity Bharti could exploit. "Bharti is a pioneer in bringing down tariffs sharply yet maintaining strong margins," says Mahesh Uppal, director, ComFirst. "Once Bharti brings its efficiency into MTN, the South African firm's numbers will look much, much better.

That, of course, assumes Bharti will pull off the deal. If it does, this would easily be the mother of all deals, dwarfing even the $11.3 billion that Tata Steel paid for AngloDutch steelmaker Corus in 2007.

Update on Bharti-MTN negotiations