Mumbai: Anil Ambani, the billionaire chairman of Reliance Communications Ltd (RCom), which is in merger talks with MTN Group Ltd, Africa’s biggest phone firm, could get around a sticky issue capping the magnitude of his stake in MTN by forming a holding company that will have other investors, including the Dubai Development and Investment Authority (DDIA).
The structure, mentioned by a person familiar with the various options Ambani is considering, will help Ambani cap his stake at 35% in the merged entity to avoid triggering an open offer for shares.
South African rules mandate that a person owning more than 35% of a company’s equity will have to make an open offer. The RCom-MTN merger will see the Indian company being merged into the Johannesburg headquartered telco, but leave Ambani as the single largest shareholder.
Options previously reported by media as having been considered by Ambani would have entailed an open offer. The new structure will see Ambani and some investors create a holding company. Ambani will have a majority stake in this company, which will hold stake in the merged entity. However, the other investors in this company will effectively own 5-10% in the merged company. They will cede voting rights of these shares to Ambani in return for an assured rate of return on their investments, said the person mentioned in the first instance, who asked not to be identified.
Executives at DDIA and the spokesperson for RCom could not be reached. An MTN spokesperson said she could not confirm the development on DDIA.
This structure will allow Ambani, who is battling regulatory restrictions, a possible rival bid from multinational telcos, and the legality of an agreement signed by RCom in January 2006 when it was still controlled by his brother Mukesh Ambani, to control up to 45% of the merged entity.
The structure being considered now is similar to one examined by RCom and MTN seven months ago, said the person. “It was almost consummated then; the only difference now is that the valuations in the deal have gone up about 5%.”
MTN is valued at some $42 billion (Rs1.8 trillion) and RCom, India’s second largest mobile phone services firm by customers, at around $28 billion. The merger could create a company with 115 million customers.
Deutsche Bank AG, earlier an adviser to MTN when it was in merger talks with RCom’s bigger rival Bharti Airtel Ltd last month, has now become the lead banker to Ambani in the deal, according to people familiar with the developments. Ken Costa, chairman of Lazard International, is also advising the RCom team.
Merrill Lynch and Co. Inc. is the financial adviser for MTN.
On Monday, Mint reported that the two companies were close to signing a term sheet, a non-binding agreement setting forth the basic terms and conditions under which a deal such as a merger will take place. On the same day, a person with knowledge of the talks said Anil Ambani will be named the chairman of the merged entity.
On Friday, RCom disclosed that it faces a potential challenge to the deal from Reliance Industries Ltd (RIL), controlled by Mukesh Ambani. Anil and Mukesh split their businesses in June 2005, but have increasingly fought each other in small and big ways. RIL has claimed a right of first refusal on RCom shares in a letter last Thursday to MTN, its main shareholders, andadvisers. RCom has calledthe claim “legally untenable”.
On Wednesday, an RCom executive told news agency PTI that the company would “start criminal proceedings against RIL officials” who had signed the agreement giving RIL the right of first refusal in case the Mukesh Ambani-controlled firm continued to “assert its alleged right”.
An RIL spokesperson said in a statement, “There is no criminality attached to the signing of the agreement dated January 12, 2006. If any proceedings are adopted, we will not only defend them but will also consider our options for such a malicious action.”
MTN’s board meets on Thursday ahead of its annual general meeting.
PTI contributed to this story.