"FRESH START EXCLUSIVE TALKS HAVE BEGUN"

MTN may’ve to make open offer to RCom investors

Kausik Datta & Bodhisatva Ganguli MUMBAI

THE proposed deal between Reliance Communications (RCom) and MTN may involve an open offer by the South African telco to the shareholders of RCom. The broad contours of the deal, on which both the parties began exclusive talks on Monday, may result in the transfer of Anil Ambani’s two-third equity stake in RCom to MTN’s shareholders against his acquisition of around one-third equity in the foreign company. Under Indian law, any acquisition above 15% triggers a mandatory open offer for a further 20% stake for minority shareholders.

In the two-step structure being discussed, MTN will become the holding company of RCom. But Mr Ambani will, in turn, have a direct one-third equity stake in MTN and an indirect holding of nearly 20% in RCom.

In effect, the Anil Dhirubhai Ambani Group (ADAG) will become the largest shareholder of the combined entity, which is likely to be christened MTN Reliance. His holding in RCom will marginally go up if the follow-on open offer succeeds, said sources. The proposed transaction between ADAG and MTN will be a share swap while the offer to minority shareholders will be obviously in cash. There is however no certainty regarding any of this given the regulatory complexities involved.

The deal would need approval from the Indian and South African authorities as well as from 21 other counties where MTN is present.

RCom on Monday announced before the Indian markets opened that it has begun ‘exclusive’ talks with MTN in what could result in the creation of the world’s fourth largest wireless telephone operator with a subscriber base of over 116 million in 23 countries. MTN also separately confirmed the development, barely two days after the country’s largest telco Bharti Airtel withdrew from similar negotiations with MTN, blaming the latter’s management for not honouring its initial agreement. ET had reported on Monday (26 May) that a formal announcement was likely on that day.

Considering RCom’s market capitalisation of $28 billion, a twothird stake would cost around $18 billion, while one-third of MTN’s equity is valued at $12 billion. However these calculations are at current levels of market capitalisation. In reality, Mr Ambani is likely to ask for a substantial premium for his stake. MTN in turn will surely seek a premium in return for ADAG becoming the single largest shareholder with management rights. It is also not clear if ADAG will transfer its entire 66% stake to MTN or a large chunk of it. Sources close to the transaction say that no debt is involved. The uncertainty in all this is whether Mr Ambani will eventually agree to a structure that Sunil Mittal’s Bharti Airtel turned down. Mr Ambani is on a holiday with his family, coincidentally in South Africa, and may meet MTN’s top-brass shortly. RCom faces uncertainties with MTN deal

“HE LEFT for South Africa on Saturday and is likely to be back this weekend,” sources said. A senior ADAG official was in London last week where he is believed to have met MTN representatives.

The other major source of uncertainty is that Mr Ambani’s control over the proposed combined entity will be eventually dependent on an entity that is listed on the Johannesburg Stock Exchange. That would expose ADAG to South African political risk. Though this does not impact RCom’s minority shareholders, Mr Ambani will have to take a call if he is comfortable with this situation. Further, MTN is present in Iran and Sudan, countries that the US does not view with favour. It’s not clear if this issue will be a deterrent for RCom which has operations in the US.

Mr Ambani & Co have to woo the MTN chairman Cyril Ramaphosa and its CEO Phuthuma Nhelo, in addition to Azmi Mikati, a prominent shareholder, to tweak the deal in his favour before the exclusive agreement expires in 45 days. So it’s expected that a series of meeting between them will take place shortly.

Another problem that RCom may face is that MTN will ask for a premium over the price quoted by Bharti. Also it’s not clear if becoming the single largest shareholding will translate into management control or whether that will have to be shared with MTN’s current management. “Bharti has already set the benchmark on issues like pricing, representation on the board, chairman and CEOship etc. Now MTN will ask for something more,” he said. MTN has already set the tone by informing the Johannesburg stock exchange that “it was approached by RCom”, an unusual revelation at this stage of the transaction. It said there is no certainty that the discussion with RCom will result in a transaction.

Mr Ambani, in a press statement, said on Monday: “We are delighted to be engaged in exclusive negotiations with MTN to achieve a partnership, which would provide investors customers and the people of both companies a unique and global platform for exponential growth, creating substantial long term shareholder value.” The exclusive arrangement means MTN will not talk to any other suitor in the next 45 days.

RCom’s stock on Monday slipped 5.1% to close at Rs 543.20 on fears of that it will be an expensive deal for the company. Bharti stock recovered 3.25% to close at Rs 863.15. If the deal goes through, it will create the world’s fourth largest telco after China Mobile, Vodafone and China Unicom. It will cover 23 countries with 183 million subscribers.