"Reliance could offer MTN right connection"

Amy Yee, Joe Leahy in New Delhi, Andrew Parker in London

After Bharti Airtel hung up on South African telecommunications group MTN on Saturday, few industry observers were surprised that rival Reliance Communications was lurking in the background.

Reliance, India 's second-largest mobile phone operator, on Monday announced it would be holding six weeks of exclusive talks with MTN over a potential merger to create one of the leading telecoms groups in emerging markets. "This is a formidable arrangement putting these two together," said one person close to the deal. "You have a very strong emerging markets connection."

Like Bharti, India 's largest mobile operator, Reliance has global aspirations. After losing last year's keenly-contested $11bn takeover of Hutchison Essar, India 's fourth-largest mobile operator, to Vodafone of the UK, Reliance needs to raise its game or risk becoming an also-ran.

A combination of Reliance and MTN could put the merged entity into the top tier of telecoms groups, which include China Mobile, the world's largest mobile operator by market capitalisation, and Vodafone, the largest wireless company by revenue.

Bharti blamed MTN for the sudden collapse of talks that began early this month. People close to the situation said Bharti proposed buying MTN at R165-175 per share, which would have valued the Johannesburg listed company at $41bn-$44bn. It would have set a record for a cross border acquisition by an Indian company.

However, after intense negotiations, MTN began to worry that a takeover of one of South Africa's most successful post-apartheid companies would be politically unacceptable. It proposed that Bharti's main shareholders instead swap their stakes for stock in MTN. This would have made Bharti an MTN subsidiary - a proposal the Indian company said on Saturday would have "severely compromised" it.

Reliance first made contact with MTN late last year but talks fizzled out after it ran into the same issues that rattled Bharti this time, said people familiar with the situation.

But some industry observers questioned whether Reliance could achieve what Bharti could not.

Reliance, with 48m mobile customers and a market value of $28bn, is far smaller than Bharti, which claims 64m wireless customers and a market capitalisation of $38bn.

Sunil Bharti Mittal, the charismatic founder and chairman of Bharti, is known for his collaborative style.

He "is the only person who had the chemistry to pull off" a deal with MTN, said an executive at a rival Indian telecoms company.

Anil Ambani, the billionaire chairman of Reliance, has a more aggressive and controlling management approach, added the executive.

Reliance has been steadily venturing overseas. On Monday it announced that a subsidiary would buy Vanco, the troubled UK telecoms company.

What Reliance brings to the table with MTN is a greater eagerness to make a splash.

People familiar with the deal talks said that Mr Ambani is comfortable with MTN's preferred model for the merger. The talks are focused on a reverse take-over under which Mr Ambani could swap most or all of his 66 per cent stake in Reliance for a stake in MTN of up to 34.9 per cent.

Under Indian rules, MTN would also have to make a tender offer for a further 20 per cent of Reliance.

That arrangement would be acceptable to Mr Ambani because he would end up by far the largest single shareholder in the enlarged group - the existing leading investors in the South African company would collectively hold only 23-24 per cent after the deal.

Mr Mittal would not have enjoyed the same comfort for two reasons.

First his family owns a 26 per cent stake in Bharti Airtel, according to analysts at JPMorgan, and would have ended up with a smaller stake in the enlarged group.

He also would have had trouble with Indian rules restricting foreign ownership to 74 per cent of telecoms companies. Bharti is already 65 per cent foreign-owned compared with just 10 per cent of Reliance.

However, some industry observers are not convinced of the merits of a merger between Reliance and MTN. They said a deal could distract Reliance from plans to upgrade its mobile network in India , the world's second fastest growing wireless market.