RCom-MTN deal may be a simple share swap, open offer

RCom-MTN deal may be a simple share swap, open offer
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First Published: Wed, May 28 2008. 12 34 AM IST

An MTN mobile shop in Cape Town. MTN is Africa’s biggest phone firm with networks in 21 countries and 68 million users (Photo: Bloomberg)
An MTN mobile shop in Cape Town. MTN is Africa’s biggest phone firm with networks in 21 countries and 68 million users (Photo: Bloomberg)
Updated: Wed, May 28 2008. 12 34 AM IST
Mumbai: Anil Ambani, the chairman and controlling shareholder at Reliance Communications Ltd, or RCom, India’s second-ranked mobile phone service firm by customers, could dilute part of the two-thirds stake he controls in the Mumbai company in favour of South Africa’s MTN Group Ltd as part of a merger of the two emerging market telecom businesses valued together at some $66 billion, or Rs2.8 trillion, people with knowledge of the merger talks between the two said.
An MTN mobile shop in Cape Town. MTN is Africa’s biggest phone firm with networks in 21 countries and 68 million users (Photo: Bloomberg)
Ambani, ranked sixth on the Forbes list of the world’s richest people, will end up holding between 20% and 40% in MTN, which in turn will be given 30- 50% in the Indian firm, an industry executive said on the condition of anonymity. Depending on how much equity he transfers to MTN as part of the deal, Ambani could end up retaining up to a third of RCom directly.
The management structure at MTN and RCom will remain unchanged but the companies may opt for a common board of directors eventually. MTN is Africa’s biggest phone firm with networks in 21 countries spanning South Africa to Nigeria to Iran. It has more than 68 million customers to RCom’s 45 million in India. MTN is valued at some $38 billion by market capitalization against RCom’s $28 billion.
The merger structure being discussed would not face regulatory hurdles related to foreign equity permissible in Indian telecom firms (capped at 74% currently) and is being favoured by the two sides for its minimal impact on cash and debt as part of the merger, the person said. The foreign ownership in RCom is under 10% currently, allowing adequate headroom for MTN to come in as even a dominant shareholder with a majority control.
Johannesburg-listed MTN is controlled by an investment trust controlled by the company’s management, which holds 13% of the company, and 11% owned by the Beirut-based Mikati family.
An alternative structure dependent on debt could run into US regulations that disallow a US citizen or agency to deal with any person or entity dealing with those blacklisted under some US sanction or the other. Under Washington’s Office of Foreign Assets Control rules, countries such as Iran, Syria, Cote d’Ivoire and Liberia—countries in which MTN has networks—are blacklisted, making it potentially difficult for US lenders and investment banks from participating in the merger.
An open offer for RCom shares is likely, the person confirmed. The Economic Times had on Tuesday first reported the possibility of such a public offer for the Indian phone firm’s shares, in keeping with takeover rules here.
RCom units Reliance Globalcom Ltd and Flag Telecom Plc. as also a few firms acquired recently, will remain subsidiaries of RCom under this structure, which is “reasonably there” but has not been finally agreed upon by the two sides, the personclarified.
A second person familiar with the talks said initial discussions between the two companies are going on. “There are various things that will be discussed during the next 45 days, like what kind of business combination can be freezed upon, what emerging areas in which the business could be combined. There will be multiple things that will be discussed and considered before a final structure is decided,” the source said.
Meanwhile, shares of RCom recovered slightly on Tuesday, rising 1.57% to close at Rs551.75 each. MTN shares continued to fall for the third consecutive trading day and closed at 140.76 rands, losing 4.9% from Monday, when it dropped 5.7% on the Johannesburg Stock Exchange after its merger negotiations with India’s Bharti Airtel Ltd failed on the weekend.
R. Jai Krishna of Mint and Bloomberg’s Janice Kew contributed to this story.
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First Published: Wed, May 28 2008. 12 34 AM IST