"It’s Talk Time: RCom and MTN scribble share-swap fineprint"

Kausik Datta and Bodhisatva Ganguli MUMBAI


RELIANCE Communications’ (RCom) Indian minority shareholders may get the option to swap their shares with MTN at the same rate as its promoters, the Anil Dhirubhai Ambani Group (ADAG). Minority shareholders will of course have the conventional option of encashing their holding in RCom by participating in the open offer that may be launched by MTN.

This is one of the possibilities that RCom is weighing as it tries to strike a deal with MTN which, if successful, will create an entity with combined market capitalisation of $66 billion and with a presence in 23 countries. This is in line with RBI’s norms which allow spending of $50,000 by an individual in foreign markets a year. Indian minority shareholders hold 23% in RCom while foreign investors control of 11% stake. ADAG holds 66% equity in the country’s second largest private wireless telephone company.

Sources close to the development said a clearer picture of the deal has emerged in the past four days after the parties engaged in hectic parleys. MTN, sources say, they would sign an agreement to buy up to 74% in RCom — the maximum permissible foreign equity holding in an Indian telecom company. The proposed transaction involves two steps. The first step would a mandatory open offer for 20% for the minority shareholders. In the next stage, depending on the response to the open offer, Mr Ambani will swap his shares in RCom for MTN shares, enabling the latter to reach 74%.

This can be better explained with an example. Consider two extreme cases — one where the entire lot of foreign investors of RCom (11%) opt for the MTN open offer, and two when they stay away from it but the offer receives subscriptions from the Indian minority shareholders. In the first case, MTN’s holding in RCom, post the open offer, will be 11% and therefore, Mr Ambani will need to swap 63% of his RCom stake in MTN shares to enable the latter to reach the 74% FDI limit. The second scenario would help MTN end up with 20% stake, post the offer, while the existing foreign investors would continue to hold 11%. In this case Mr Ambani would exchange his 43% stake in RCom to get MTN shares. If there is no response to the open offer Mr Ambani would also swap a 63% stake in RCom to enable the latter reach 74%. In other words, MTN would end up getting between 63% and 74% of RCom equity, including the open offer, and Mr Ambani would give away anything between 43% and 63% stake in RCom to get MTN shares.

Ambani may pick up 34% in MTN

DEPENDING on the share-swap ratio, Mr Ambani is expected to pick up a 28-34% stake in MTN. But he would be by far be the single largest shareholder in MTN. He would not cross the 35% mark as Johannesburg’s rules demand an open offer beyond this figure.

Newshelf 664 is the largest shareholder of MTN with a 13.1% stake. The Beirut-based Mikati family holds 10.2% while PIC has a 9.7% stake. The rest 67.1% is widely held. Post the deal, the holding of these shareholders will come down as the equity capital of MTN will expand on account of issuance of new shares to the RCom shareholders and ADAG.

Some people feel that the share swap option may not elicit a good response from Indian minority shareholders. “It is difficult to expect many takers for the share swap offer. And frankly speaking, there is no reason why a minority shareholder should be attracted to trade on the Johannesburg Stock Exchange where MTN is listed,” said a banker. Some others, however, believe that the option may lure some investors. “Minority shareholders have invested in RCom because they believe in the company’s promoters. Now one does not know whether they would like to tag along with the promoters to Jo’burg as well,” said an analyst.

However, those who are not interested in the share swap would have the liberty to sell their shares in the MTN open offer. MTN will issue fresh shares to those who want to swap their holding in RCom, including Mr Ambani. The broad contours of the deal thus indicate that Mr Ambani will emerge as the largest shareholder of MTN and RCom will be it’s subsidiary , as reported in ET earlier.