India’s Reliance Communications Ltd (RCom) and South African MTN Group Ltd need to give investors clarity. The proposed $80 billion (Rs3.46 trillion) tie-up between the two telecom operators is at the risk of falling apart unless the companies can stabilize their market capitalizations. In the last month, RCom has lost 25% of its value and MTN nearly 15%.
A legal spat on the Reliance side is the source of uncertainty. Investors had expected a deal whereby RCom would become a subsidiary of MTN. Yet Anil Ambani, who controls 65% of RCom, has had his right to exchange some or part of his holding for MTN shares challenged by his estranged brother Mukesh Ambani, who controls the other half of the divided family empire.
Grace period: An MTN mobile shop in Cape Town, South Africa. Exclusive talks between MTN and RCom are due to end on 8 July.
It’s three weeks since the legal challenge surfaced, and Anil Ambani looks far from finding a settlement.
Worse, MTN and Reliance can’t easily restructure the deal. A complex web of political and regulatory constraints led both sides to settle on a reverse takeover in the first place. An alternative deal probably has less chance of success.
So investors are left with no real idea if a deal is possible, or what it might look like. Talks between the two groups are due to end on 8 July. There’s no shortage of speculation: a full-blown takeover of MTN by RCom, finding extra capital from equity or sovereign wealth funds to finance a deal—to cite but a few.
One thing is clear. RCom’s and MTN’s volatile share prices are making an already difficult job even harder. Agreeing the terms of a share swap will be much trickier. To compound the problem, investors on both sides are worrying that either could lose out in a deal.
If RCom and MTN want to stabilize their share prices, they should clarify two things. First, whether MTN is prepared to agree a deal clouded by legal uncertainty and which could potentially get dragged through the Indian courts. Second, the structure a deal might take.
Credible answers to these questions might help secure a deal—if indeed, there’s even one left to be made.