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If deal is done, Ambani will be top shareholder

If deal is done, Ambani will be top shareholder
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First Published: Mon, May 26 2008. 11 28 PM IST
Updated: Tue, May 27 2008. 11 46 AM IST
Mumbai / New Delhi: Reliance Communications Ltd or RCom, India’s second largest mobile phone services firm by customers, and South Africa’s MTN Group Ltd have begun talks to combine operations after the Johannesburg firm’s merger talks with Bharti Airtel Ltd broke down.
Analysts predicted the chances of a deal concluding successfully between Mumbai-based RCom and MTN, Africa’s biggest mobile phone services firm, were slim but people close to the situation said negotiators representing the two sides were discussing a merger of the two with the Indian suitor readying an offer with a dominant stock component rather than cash.
“The model will be one of minimum cash outflow and higher share swap,” one person familiar with the scenario, who did not wish to be identified, said. “RCom has $3 billion cash (Rs12,825 crore) and can raise up to $10 billion debt; the rest will be shares.”
This person said an initial structure of the offer would be ready this week.
British daily The Telegraph reported over the weekend, without naming a source of its information, that RCom would table a bid worth some £20 billion, or $39.5 billion, for MTN.
The person familiar with the scenario further pointed out that the low foreign equity in RCom improved the chances of a merger deal with MTN. Foreign investors own just around 33% in the Indian firm controlled by billionaire businessman Anil Ambani, as compared to the at least 66% they own in Bharti Airtel. Analysts had said that this high level of foreign equity in Bharti Airtel, RCom’s bigger rival, was one of the stumbling blocks in its deal with MTN.
Given the high level of equity RCom chairman Ambani controls in the phone firm, he is likely to emerge the dominant shareholder in the merged entity if the two sides are able to forge a deal, the person said. Shareholders with a significant minority in MTN include an investment trust controlled by the company’s management, which holds 13% of the company, and 11% held by Beirut-based Mikati family.
MTN spokespersons could not be reached on phone and email for specific comment. Earlier in the day, the firm, which has networks in 21 countries, said in a statement that it “has been approached by the Reliance Communications Group with regards to a potential business combination between Reliance Communications and MTN. MTN has agreed to enter into exclusive negotiations for a period of up to 45 days in respect of such potential combination. There is no certainty that these discussions will result in a transaction.” RCom, too, in a statement confirmed the talks.
RCom has some 45 million mobile phone customers in India, while MTN has more than 68 million.
An investment banker said Ambani would take a leaf out of a takeover transaction concluded by steel tycoon L.N. Mittal in his firm’s takeover of Arcelor SA in 2006. In that deal, said the banker who did not wish to be named, Mittal had “consolidated all his holding into one company, Mittal Global Steel Holdings, and raised his stake to 76%. When it came to an opportunity to buy Arcelor for $38 billion, he used cash and stock. He issued shares to the tune of $9 billion and then met the remaining from debt.”
If concluded, an RCom-MTN merger—the valuations of the two companies are a combined $66 billion—would be the largest cross-border deal in Indian corporate history. The biggest merger transaction has been Tata Steel Ltd’s takeover of Corus Group Plc. for $13 billion.
A second person familiar with the deal said RCom had initiated talks with MTN and its bankers in the middle of last week, though this could not be independently confirmed by Mint. Deutsche Bank AG and Merrill Lynch South Africa (Pty) Ltd are advising MTN in this transaction, while RCom has not engaged an external financial counsel yet, according to the first person quoted.
Still, analysts said at this stage RCom’s ambitions of a union with MTN looked far from fruition. “Bharti Airtel gave it up only because they did not want to be a subsidiary of MTN,” said Alok Shende, director of consulting at Datamonitor India.
“Now, the question remains if RCom will remain a passive investor, with or without a management control.” A third person, also familiar with the talks between the two firms, said RCom does not envisage becoming a subsidiary of MTN.
This person added that RCom’s international business—including an undersea cable network with reach in 60 countries and an acquisition of a so-called 4G services firm—dovetailed well with the MTN assets.
In April this year, RCom, through its overseas unit Reliance Globacom, bought a 90% stake in eWave World, a UK-based operator of WiMax services. Voice services on WiMax—a standard that is capable of data speeds of 10 megabits per second up to 2km away from a radio transmitter—are often referred to as fourth generation or 4G mobile phone services.
The Ambani firm’s interest in Africa is not new, an expert said.
“RCom has consciously tried looking at Africa and Middle East markets; it has also got a licence in Uganda,” said Girish Trivedi, deputy director of the telecom practice for south Asia and West Asia region, at research firm Frost and Sullivan.
“After a couple of years, once the penetration level reaches at a critical mass, then the growth in the Indian market will slow. Africa is the fastest growing market in the world.” In February 2007, RCom had held talks with MTN.
Shares of RCom dropped 5% to Rs542.95 each, its lowest value since 9 May. The share had shed 2% on Friday. MTN shares fell the most in four years, slumping 6.8% to 146.30 rand. Shares of Bharti Airtel advanced to its highest since May 5 rising 3.1% to Rs863.15.
Harichandan Arakali and Carli Lourens of Bloomberg contributed to this story.
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First Published: Mon, May 26 2008. 11 28 PM IST
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