U.S. banks tread warily around Bharti-MTN deal

By Michael Flaherty and David Lawder

HONG KONG/WASHINGTON (Reuters) - A big jump in the number of mobile phone subscribers in Iran last quarter was welcome news for MTN Group (MTNJ.J), but potentially troublesome for U.S. banks eyeing a role in the South African telco's planned $20 billion-plus merger.

When MTN and India's Bharti Airtel (BRTI.BO) first discussed a tie-up more than a year ago, MTN had around 6 million users in Iran. Its business there, and in Sudan and Syria, has since grown -- a fact that has not escaped U.S. banks milling around the deal.

Nobody in Washington D.C. is saying publicly that U.S. banks should be barred from playing a role in the merger of the two emerging market telecom companies. Not yet, anyway.

But MTN's annual report says 13 percent of its 2008 revenues came from Iran, Sudan and Syria -- three states where the U.S. Treasury's Office of Foreign Assets Control (OFAC) sets tough restrictions on U.S. firms, effectively banning them from most direct and indirect dealings due to U.S. sanctions. (here)

The number of MTN's subscribers in Iran alone rose 14 percent to 18.2 million last quarter.

Bank of America-Merrill Lynch (BAC.N) is advising MTN on the deal, with Deutsche Bank (DBKGn.DE). Sources involved in the offer say Goldman Sachs (GS.N) is advising Bharti shareholder Singapore Telecommunications (STEL.SI), which owns 31 percent of the Indian company. Both BofA and Goldman declined to comment.

Several other U.S. banks are in talks to provide financing for the merger plan, sources say, which involves Bharti and MTN buying into each other to create the world's No.3 wireless group.

While US lenders would like a cut of the deal, sources at the banks say there is a lot of discussion at top levels to determine how to proceed within the boundaries of OFAC.

The sanctions were imposed by U.S. presidential orders over the years for a range of issues including attacks on Persian Gulf shipping, alleged state sponsorship of terrorism, assassinations and human rights violations.

A U.S. Treasury official declined to comment on the MTN-Bharti advisory work by U.S. banks, but said there was some room within OFAC rules for U.S. companies to deal cautiously with situations involving deals with foreign firms that have subsidiaries in the sanctioned areas -- as long as they are not facilitating transactions with the sanctioned countries.

"U.S. persons are not necessarily prohibited from dealing with third-country firms that do business in sanctioned countries, although they should approach such dealings carefully," said the official, who was not authorized to speak publicly about OFAC's enforcement of sanctions.

For investment banks with advisory or underwriting fees at stake, that interpretation has created two schools of thought.

One is a more liberal view of the sanctions, which appear to have some wiggle-room when it comes to mandates and financings that are "third-country" as opposed to dealing directly with a company whose headquarters are in a sanctioned country.

Then there is the conservative view, which sources say has led some bankers and lawyers to steer clear of a Bharti-MTN type deal on the premise that facilitating such a transaction toes too close to OFAC, even though the merger indirectly involves the sanctioned areas.

And it's not just Bharti-MTN that's brought this up lately.