Anil Ambani will struggle to get a firm grip on MTN Group Ltd. The Indian telecom billionaire wants to swap most of his 66% stake in Reliance Communications Ltd for control of its larger South African rival.
Reliance Communications said on 16 June that talks with South African mobile operator MTN were ongoing despite claims from Mukesh Ambani’s Reliance Industries Ltd that it has first right of refusal.
A successful deal will create a group with a market capitalization of $60 billion (Rs2.57 trillion).
MTN and Reliance Communications entered exclusive tie-up talks last month following the collapse of discussions between the South African group and India’s largest mobile operator, Bharti Airtel Ltd.
The numbers are tricky. With Reliance effectively becoming a subsidiary in the new structure, Ambani will be squeezed to get close to the 40% he is reportedly eyeing.
The main constraints are political. Reliance and MTN both have to retain their respective listings in India and South Africa. On the Indian side, foreign ownership of telecom operators is limited to 74%. On the South African side, MTN is under pressure to ensure that less than 50% of the enlarged MTN group falls into Indian hands.
For MTN to get a 74% interest in Reliance, it would have to stump up cash or shares worth $20 billion, based on the undisturbed share price. Assuming the South African group pays in shares, MTN would have to issue equity amounting to just over half its outstanding share capital, or roughly 37% of the new group.
Here’s the tricky part. For the swap to work on Ambani’s side, he needs to walk away with a controlling interest in the new MTN and ideally keep a sizeable stake in Reliance. The deal structure is made complicated by Indian takeover law, which requires Reliance’s 33% minority holders to get the same offer as Ambani.
If the bankers can get it right, Ambani could pay cash for the shares MTN issues to buy out the minority holders in Reliance, and also exchange some of his Reliance shares for MTN shares.
Finding a ratio that is attractive enough for minorities to tender at one stage and Reliance to tender at another will require some skilled fine-tuning.
Assuming all the minorities tender and Ambani holds on to 25% of Reliance, he will end up with at best 37% of the enlarged MTN. That raises two potential problems.
It’s a high number in South Africa. Normally, under the country’s takeover law, the acquisition of more than 35% would trigger a full bid from Ambani.
This could be waived with approval from 75% of MTN’s shareholders.
Yet, that 37% holding could be a low number for his estranged brother, who claims he has first right of refusal on Reliance shares if the company is sold. If that claim stacks up, Anil Ambani will be pushed to demonstrate he has not sold off the family silver and retains control of the assets.