China Syndrome Haunts India Inc.
The failed bid by Bharti Airtel to acquire South African telco major MTN has raised questions as to whether Indian companies are facing a fate similar to that felt by Chinese companies that were thwarted by interests that didn't favour Chinese ownership. While most deals involving Chinese companies were called off due to economic reasons or differences on valuations, there have also been instances when the deals were terminated on grounds that they would otherwise cede greater control to Chinese firms, making governments and corporations jittery. This, according to people tracking Indian corporate developments, could play a role in future acquisitions by Indian companies, especially after the series of high-profile global acquisitions in the recent past, including Tata Steel-Corus, Tata Motors-Jaguar Land Rover and Hindalco-Novelis deals.
Bharti and MTN last week decided to call off their talks after the South African government expressed concern that MTN may not maintain its South African identity after its merger with Bharti. The deal was estimated to yield $24 billion in revenue and would have created the world's fourth-largest telco apart from giving Bharti, ownership of a combined entity spread over 24 countries and 200 million users.
Bharti said the structure of the proposed deal failed to get approval from the South African government, as it wanted MTN to remain in South Africa. South African Reserve Bank Governor Tito Mboweni has been reported as saying that the country's authorities "didn't like" the merger. "MTN must remain a South African company," he said. "It's a very important asset. The chairman, the chief executive officer, the chief operating officer must reside in South Africa." His views were echoed by communications minister Siphiwe Nyanda who is also reported to have said that Johannesburg-based MTN should remain a South African company.
The situation is similar to what Chinese companies experienced recently. In June, the Chinese government suffered a major setback when its largest ever investment in a Western company, a proposed $19.5-billion equity stake in Australian-British mining giant Rio Tinto Group, collapsed due to stiff opposition from political parties. Rio then went on to join hands with rival BHP Billiton. While the failed talks dealt a blow to China's aim to own a large share in the global resources market, the Australian media reported it had saved the Kevin Rudd government in Australia from a political and diplomatic headache.
China has also experienced similar results in oil. Hit by a series of failed oil deals in Angola and Libya where most refining interests are controlled by western interests, China's state-owned CNOOC has been pursuing large stakes in the Nigerian oil industry. Media reports say CNOOC has renewed efforts to buy six billion barrels of oil—or a sixth of the proven reserves in Nigeria—a move that could put it in direct competition with Royal Dutch Shell, Chevron, Total SA and Exxon Mobil Corp. It has been reported that these companies control all or parts of the 23 oil blocks sought by China. In 2005, CNOOC made an unsolicited, all-cash bid of $18.5 billion for Unocal making lawmakers in US jittery as it meant the Chinese government would own one of US's largest companies. "Although India is not as big a threat as China, the perception about India is changing definitely. We are not viewed anymore as only an outsourcing destination, but also as an acquirer and as a large consumer," says Abizair Diwanji an executive director with KPMG and who has worked on large global deals.
The change in perception about India started with Tata Tea's £270-million (Rs 2,025 crore at current exchange rates) acquisition of UK's Tetley Tea in 1999, and gained momentum with acquisitions of Corus and Jaguar Land Rover (UK) and Novelis (Canada).
"The nature of ownership in foreign companies is also a major factor in such cross border deals," says a veteran banker who asked not to be named. "Almost all foreign companies, unlike Indian firms, don't have promoter groups. They would have groups of shareholders who will decide on whether an offer is attractive. In such a scenario, there is no block shareholding that is transferred. So non-cost considerations also come into play," said the banker, who had been involved in many large cross border acquisitions.