Bharti Airtel Ltd. (532454.BY) and South Africa's MTN Group Ltd. (MTN.JO) Wednesday ended exclusive merger discussions for a second time, as regulatory hurdles proved insurmountable.

In a statement, Bharti cited the South African government's disapproval of the deal structure in its current form as the reason for the collapse of the talks, while MTN attributed their failure to the "economic, legal and regulatory framework" in which the companies operate.

South Africa's National Treasury said the deal was outside the country's exchange control framework and required the approval of the Minister of Finance.

The structure of the proposed $24 billion deal would have seen Bharti acquire a 49% stake in MTN, while MTN would have bought a 36% stake in Bharti.

However, under rules brought in by India's Securities and Exchange Board in September, MTN would have needed to make a mandatory offer for another 20% of Bharti on top of the original 36%, pushing the foreign investment in Bharti over the 74% limit as there are other foreign investors on the Indian mobile operator's share register.

In addition, the South African government demanded a dual-listing, something that Indian regulations prohibit, to reflect the status of MTN as a national champion. MTN operates in 21 African and Middle Eastern countries. Bharti Airtel is India's largest mobile operator by subscribers.

A combined Bharti-MTN would have created the world's third-largest mobile phone operator by subscribers behind China Mobile Ltd. (CHL) and Vodafone Group PLC (VOD), with about 200 million customers and revenue of more than $20 billion.

MTN, in a statement to the Johannesburg Stock Exchange, expressed appreciation for the cooperation and supportive approach of both the Indian and South African governments.

"This structure needed an approval from the government of South Africa, which has expressed its inability to accept it in the current form. In view of this, both companies have taken the decision to disengage from discussion," Bharti Airtel said.

South African officials visited their Indian counterparts late last week to press for a structure that would allow the companies to maintain separate sets of shareholders and still combine cash flows and operations, rather than a traditional merger. But such a "dual-listing" structure would require significant changes to Indian corporate law.

"This seems more like a call by the governments. The Bharti stock is likely to outperform markets by 5%-6% tomorrow," said analyst Nishna Biyani at Mumbai-based brokerage Prabhudas Lilladher.

"As a skeptic we've said that one way of getting a deal derailed is to involve the government," said London-based analyst Martin Mabbutt at Nomura, adding that ultimately he believes the breakdown of the deal was a good thing because the price Bharti was prepared to pay for its stake in MTN was too low and the synergy benefits weren't achievable. Nomura has a buy rating and ZAR132.60 target price on MTN.

MTN has failed several times to secure a tie-up that would have launched it into the Indian market. Earlier talks with Bharti broke down in May 2008 when the companies couldn't agree on issues of control. MTN then began talks with rival Reliance Communications Ltd. (532712.BY) but they also failed.

Bharti, like other wireless operators in Asia, has been looking at emerging markets for growth to help boost its revenue base. Africa remains one of the largest undeveloped markets for telecoms companies.

Bharti Airtel’s shares closed flat at INR418.55 on the Bombay Stock Exchange Wednesday.

Trading in MTN shares was suspended on the Johannesburg Stock Exchange until Oct. 1.

 
   -By Rumman Ahmed & R Jai Krishna and Kathy Sandler, Dow Jones Newswires; 91-9845104173; rumman.ahmed@dowjones.com