" RIL, RCom joust as MTN deadline ends "

THE war of letters between Anil Ambani’s Reliance Communications (RCom) with Mukesh Ambani’s Reliance Industries (RIL) is increasingly assuming ludicrous proportions. The media and public relations war escalated the day before its 45-day exclusive period for merger talks with the South African telco MTN expires on Tuesday. MTN and RCom are expected to update the stock exchanges on the status of their negotiations on Tuesday. The bone of contention this time was an aborted meeting between representatives RCom and RIL on Monday morning.

The blame game has reached its crescendo on Monday with RIL charging RCom with “misleading media.” The RIL spokesperson said late on Monday evening that no RCom representative turned up to meet RIL at a meeting scheduled for Monday morning. This came within a couple of hours of RCom informing the media that it has invited RIL to meet in the week beginning July 14 “to clarify any doubts” on the deal structure being discussed with MTN.

The RIL spokesperson said: “RIL, on July 2 invited RCom to participate in a meeting at 11am today (July 7, 2008) to commence the process of mutual conciliation under the non-competition agreement. No representative of RCom turned up at the meeting. RIL delivered a letter to RCom at 1.49 pm today placing on record the fact that no representative of RCOM turned up at the venue for the meeting at the scheduled time. RIL received a response from RCom at 2.23 p.m. refusing to participate in the meeting.”

RCom sources said they did not attend the meeting with RIL as the meeting was slated to discuss “conciliation”. High-stakes game of brinkmanship
THEY said: “There is no grounds for conciliation as RIL’s so-called claims on right of first refusal (ROFR) is untenable. We are ready to meet them to clarify details of the deal being discussed with MTN.” RCom reiterated these points in a fax sent to RIL 2.23 PM on Monday afternoon.

RIL turned down this offer. In a response to RCom’s afternoon fax, RIL has threatened to take legal action against RCom in view of the latter’s “refusal to participate in conciliation process as envisaged in the agreement.” It has also reiterated that it has already invoked the dispute resolution clause of the non-competition agreement, which was signed between RIL and various Anil Dhirubhai Ambani Group (ADAG) firms in January 2006 in order to implement the demerger of business between the Ambani brothers.

The two sides seem to be engaged in a highstakes game of brinkmanship as the negotiations between RCom and MTN enter the final stretch. With credit markets tightening and capital markets slumping around the world the legal uncertainties would not make matters easier for RCom.

The bone of contention lies in the January 2006 agreement. RIL claims that this agreement provides it a right of first refusal (ROFR) in case RCom is sold to a third party. RCOM denies any such right. These developments come amidst speculations that MTN is wary of legal challenges to the deal. Besides, unconfirmed reports said that MTN would agree to continue talks with RCOM only if had an assurance that Mukesh Ambani would drop his claims of RoFR and not derail the transaction.

Analysts share the view that the South African company would not want to be part of a combined entity whose future is uncertain. RCom shares ended the day down 4.2% at Rs 419.80 rupees, even as the Mumbai market rose 0.5%.

"Kingfisher may buy Spicejet in cash deal"

Mallya in talks to buy out Kansagra family & Istithmar. Open offer for 20% to follow

ANOTHER round of consolidation in the domestic skies looks imminent, with UB Group chairman Vijay Mallya engaging in talks with two major shareholders of SpiceJet to buy out the budget carrier in an allcash deal. According to industry sources, the Bangalorebased tycoon is negotiating with Gulf-based fund Istithmar and UK-based Bhulo Kansagra family, who together hold 26.33% in the low-cost airline. The acquisition of their stake by Mr Mallya would trigger an open offer for another 20% from other shareholders.

The Kingfisher chief followed the same strategy to acquire the country’s largest low-cost airline, Air Deccan, last year. Now, the budget carrier is being merged with Kingfisher. Going by the current share price of SpiceJet on BSE, a 26.33% stake in the company is valued at Rs 158.40 crore. The SpiceJet share closed at Rs 25 on Friday, up 7.76% over the previous day.

The Tatas also hold a minor stake in SpiceJet through two investment companies. There was speculation that they may take a larger role in the airline but the group nixed the buzz by insisting that the holding is purely a financial investment.

“Kingfisher has been in talks with SpiceJet for a possible stake acquisition for a month now. The Kansagra family and Istithmar are likely to exit the company. While Mr Kansagra is keen for an early deal, Istithmar is looking for good value,” an industry source said. Meanwhile, SpiceJet is also talking to a non-aviation investor for infusion of fresh funds, the source added.

Gurgaon-based SpiceJet has cut down its flights to 94 per day from 117 a day last month. The airline is not immune to the impending financial crisis in the aviation industry due to spiralling fuel prices. In a move to reduce losses, the low-cost carrier is reducing capacity in the market and sub-leasing aircraft. It has already sub-leased one aircraft to the Netherlands-based Trasavia Airlines. SpiceJet is planning to sublease two more aircraft shortly.

Kingfisher, along with low-cost arm Deccan, operates about 83 aircraft and operates 440 flights a day across the country. SpiceJet, which has nearly 11% market share, operates 94 flights a day with 15 Boeing aircraft. To expand its fleet and operations, the budget carrier is planning to raise $100 million from the market. While it has been looking for an investor for the past few months, it hasn’t yet got any.

With fuel prices at an all-time high, almost all domestic carriers are reducing capacity. Indian airlines, which lost about $1 billion last fiscal, are expected to double the figure in the current fiscal.

Mr Mallya’s move to acquire SpiceJet is expected to give Kingfisher enough muscle in the domestic market. If the deal goes through, the UB Group will hold a 40% share in the domestic market and set fare levels across key sectors.

"WAR CHEST FOR MTN"

Fund Hunt: RCom to raise $6 b from banks

ANIL Ambani’s Reliance Communications (RCom) is in talks to raise up to $5-6 billion from banks to part finance its planned acquisition of the South African telco, MTN. RCom may pledge the shares of MTN to raise the funds and also provide some sort of guarantee to the lenders.

Sources in the know said Deutsche Bank, HSBC and Barclays, among others, are putting in place short-term financing for RCom to finance the deal. A few Indian banks and a host of European banks have also offered an underlying commitment to lend money for the transaction. RCom will have to repay this debt in a year or so by raising long-term funding.

RCom’s 45-day exclusivity period (during which MTN could not consider any alternative partner) ends on July 7. It is unlikely that the transaction would be completed by then, an industry official said. Instead, the exclusivity period might be extended.

The entire transaction is expected to be routed through a special purpose vehicle (SPV). In addition to RCom, the other partners could also pick up equity in this SPV. RCom is learnt to have been in talks with a Middle East-based sovereign wealth fund and a couple of private equity players to offer stake in the SPV. It is learnt that the private equity funds are not too keen to participate in the SPV while the sovereign fund is very interested in it. RCom will likely hold a majority equity stake in the SPV.

Sources said the other equity holders of the SPV are expected to chip in around $4 billion. Given MTN’s current valuation of nearly $28 billion, a deal is expected to be done at a valuation of around $35 billion, assuming a 20% premium. This means, the SPV may need to pay around $11-12 billion for a 35% stake. RCom will have to chip in $7-8 b

GIVEN the other equityholders’ contribution of $4 b, RCom will have to chip in around $7-8 b. This is likely to be funded by a mixture of internal accruals and debt. The exact amount of debt depends on the amount of equity which RCom is willing to put in. The acquisition cost will go up if RCom is allowed to hike its stake further to 40%. Both the parties are yet to arrive at the exact deal size which would depend on the premium, sources said. The SPV will directly acquire a shade below 35% in MTN, the maximum permissible limit in South Africa without triggering a tender offer. Then, RCom will look at a ‘whitewash procedure’ under which MTN shareholders will be asked to vote to waive their right to a tender offer. If the shareholders agree, RCom/SPV will scale up its stake to 40%. Otherwise, it will be content with a shade below 35% stake in MTN.

Sources said RCom is also examining the possibility of offering preference shares to investors who will be picking up a stake in the SPV. However, the investors are more interested in having a direct equity in SPV. “Talks between both the parties to sort out the nitty-gritty are going on,” said a source.

This new structure is a sharp departure from the reverse merger route which was earlier discussed by the two companies. Under the reverse merger route, MTN will become the holding company of RCom although Anil Dhirubhai Ambani Group — RCom’s promoters — would have become the single largest shareholder of the Johannesburgbased telco. The deal was designed to be consummated through an open offer by MTN for RCom shareholders and swapping of ADAG’s shares in RCom for MTN shares.

However, the possibility of a prolonged legal dispute may have stymied the reverse merger structure as Mukesh Ambani’s flagship Reliance Industries interprets this as a ‘sale’ of RCom and may claim its right of first refusal in RCom. Citing an agreement which was signed between Reliance Industries and three entities of ADAG, Reliance Industries had written letters to MTN and its investment banks, claiming that it enjoys a right of first refusal in case RCom is sold. ADAG vehemently denies any such right is enjoyed by Reliance Industries.

On Thursday, a second letter from RIL to RCom and MTN sparked off another war of words between RIL and RCom. The new structure ensures RCom would buy controlling stake in MTN directly, which would ensure the right of first refusal cannot be revoked. But RCom cannot leverage the balance-sheet of MTN to finance the transaction as a 35-40% stake in the foreign company would not allow it to do so. MTN will not be part of the consolidated balance-sheet of RCom.

Bankers said funding a big-ticket deal could become a problem in the wake of tight liquidity conditions across the globe. Spreads of Indian papers have moved up by around 28 to 30 basis points in the past couple of weeks. The sixmonth Libor is currently around 3.13%. The credit default swaps for RCom is now around 325 bps. They also said that there are very few debt deals in the market and most of the deals are being done on a bilateral basis. The RCom stock on Thursday slipped 6.91% to close at Rs 389.50, putting the valuation of the company at $18 billion.

"RCom looking to buy direct 40% stake in MTN"

ANIL Ambani’s Reliance Communications (RCom) may be examining alternative structures to bring about its proposed mega combination with MTN. RCom, possibly in partnership with a sovereign wealth fund based in the Middle East, may directly buy a large equity stake in MTN, emerging as the single largest shareholder. This is to avoid legal disputes that may arise from Reliance Industries’ (RIL) claims of right of first refusal (RoFR) if RCom were to enter into a reverse merger with MTN. Under the reverse merger route MTN would have made an open offer for RCom followed by a share swap between Reliance ADAG, promoters of RCom, and MTN. ADAG would then have emerged as the single largest shareholder of MTN while RCom will become subsidiary of MTN.

That plan has not been junked, but sources close to the development said RCom is also examining the option of directly acquiring a 40% stake in MTN. A Middle East-based sovereign wealth fund could join hands with RCom for the acquisition of the controlling stake in MTN. The name of the fund could not be ascertained. Since the South African stock exchange rules require any acquirer to launch a tender offer if its holding crosses 35% stake in a company, RCom intends to acquire a shade lower than the threshold limit. Subsequently, RCom is looking at a “whitewash” procedure under which MTN’s shareholders will be asked to vote to waive their right to a tender offer. If the shareholders agree, RCom will scale up its stake to 40% in MTN.

Otherwise, it will be contend with a stake just under 35%. However, RCom will emerge as the single largest shareholder by far with its 35% stake. Newshelf 664, a trust, is currently the largest shareholder with its 13% stake.

A 35-40% stake would however mean there would be no consolidation of revenues and profits in RCom’s books though there may be other synergies.

Industry officials said MTN could be valued at $35-40 billion against its ruling market capitalisation of nearly $30 billion for the transaction. So, RCom will have to chip in $12-14 billion for the purchase of 35%. Its fund requirement will go up if the MTN shareholders allow it to acquire another 5% stake.

The transaction may be routed through a special purpose vehicle in which RCom will hold majority control with the sovereign fund holding the remaining stake. SPV will raise debt too

In addition to the foreign fund’s equity contribution, the SPV will raise debt to finance the deal. So, the pressure of funding the deal will be substantially reduced from RCom’s balance sheet. An RCom spokesperson declined to comment.

If the deal goes through in this form, it will be one of the largest overseas acquisitions by any Indian company. Tata Steel so far tops the list with its $12.9 billion purchase of the Anglo-Dutch steel maker Corus.

Interestingly, RCom had entered into the discussions with MTN after the foreign telco refused to sell a majority stake to Bharti Airtel. A source close the development said MTN always wanted to combine the strength of the two companies. “The new structure proposes that RCom, instead of ADAG, will be the controlling shareholder of MTN. Both RCom and MTN will enhance their partnership later. More importantly, this is the best option available under the changed circumstances,” he added.

‘Changed circumstances’ refers to RIL’s interpretation of a reverse merger of RCom with MTN as ‘sale’ of RCom leading to RIL possibly attempting to exercise its claimed RoFR in RCom. “It’s certain that Reliance Industries will take legal recourse if RCom reaches a reverse merger with MTN. The new structure, if it goes through, will mean RCom directly buying a controlling stake in MTN. This beyond the so-called RoFR claims,” they added.

Sources said both the parties are expected to extend the 45-day exclusive merger talks (during which the two sides would not talk to anyone else), which is slated to expire on July 8, by a couple of weeks. The due diligence is likely to be over by this week.

Newshelf 664 is the largest shareholder of MTN with a 13.1% stake. The Beirutbased Mikati family holds a 10.2% while PIC has a 9.7% stake. The rest 67.1% is widely held.

Meanwhile, Fitch Ratings upgraded MTN’s national long-term rating to ‘AA-(zaf)’ from ‘A+(zaf)’ with a stable outlook, reflecting MTN’s position as a leading emerging market mobile tele-communications player following considerable operational growth and its proven ability to operate successfully in challenging environments. Fitch said the rating is supported by strong cash flow generation, low leverage and strong liquidity position of MTN which has a subscriber base of over 116 million in 23 countries.

"M and As turn sour for India Inc"

The tide seems to be turning for corporate India on the overseas acquisition front.

After a string of foreign deals in the last few years, including Tata Motors' purchase of Land Rover and Jaguar brands from Ford for $2.3 billion this year, attempts by Indian companies to acquire assets abroad are increasingly hitting roadblocks. At least, the recent attempts by Indian companies suggest so.

Be that of Essar Steel's attempts to buy US steel firm Esmark for $1.2 billion (over Rs 4,500 crore), Sun Pharmaceutical's onging bid for Israeli firm Taro Pharmaceutical or Sterlite Industries' bid for Asarco's mining assets, the overtures by Indian companies have failed to hit the target.

Last week, Taro withdrew from its $454-million merger agreement with Sun, citing differences on pricing and the financial turnaround Taro achieved since last year. In the case of Sterlite, the former parent of Asarco, Grupo Mexico, has submitted a bid for the company's assets after the Indian company was shortlisted as the preferred bidder.

"The deals are being done in mature markets, where firms have to deal with the law of the land, bankruptcy process, unions, or aggressive bidders. It is upsetting when there's a counter-offer at a later stage like Grupo Mexico's bid for Asarco,'' said Sanjeev Kishan, director, PricewaterhouseCoopers.

Unlike in India, where a buyer can deal with a promoter having significant stake, the target companies in the West are widely-held and board-driven companies.

The board of directors have to ensure the best deal for the shareholders, and hence, insist on a "fiduciary out" clause in deals, which says that if the market conditions change (turnaround/if someone offers a higher price), it has the right of the company to back out.

"Until a deal is done and you have paid-off the shareholders, it is not done. Some of these deals have run into this problem," said Raj Balakrishnan, director, Merrill Lynch.

Though Essar's bid had the support of Esmark's management, the US steel company had to back Russian company Severstal's bid, which was higher than Essar's by just 25 cents per share and had the support of the workers' unions.

Essar, which revised its offer for Esmark upwards from $17 to $19 per share after the Russian steel-maker jumped the fray, didn't want to stretch it beyond a price.

"Given the macro-economic situation, it didn't want to go beyond a price. Its room beyond $19 was limited,'' said a banker. "It's a sign of maturity; that companies are not letting their ego drive them into a bidding war,'' said Balakrishnan, which brings us to a key question: are Indian companies being less aggressive on pricing their overseas targets?

"Companies are choosing to maintain liquidity; the aggression has plateaued,'' said Gaurav Khungar, executive director, (corporate finance), KPMG, a consulting firm.

"The cost of funding has gone up, which means a greater value is going to the lenders and lesser to equity,'' added Merrill Lynch's Balakrishnan.

The 39-per cent fall in the stock markets since January 9 this year and the fall in stock values of Indian companies has affected their leverage and ability to fund M&As. Unlike in India, where lending is collateral-based, internationally debt is given on the back of a company's market-capitalisation.

Take an Indian firm, which was trading at 10 times its earnings before interest, taxes, depreciation and amortization (EBITDA) six months back and acquired a company in the US, which was trading at four times its EBITDA. The Indian company, which will consolidate the accounts of the acquired firm into its balance-sheet, will hope that its stock trades at 8-10 times its EBITDA.

"With the fall in stock market and the value of the stock, this arbitrage opportunity is reducing, said KPMG's Khungar, adding "trading multiples have come down, which has taken the aggression out. The capability to finance has come down.''

"Given the overall economic situation, Indian firms will be more selective (with acquisitions abroad). The cost of funding has gone up while the availability of funds has become limited. This impacts their ability to do a transaction,'' said Sudip Rungta, head, M&A (hydrocarbons and technology), Essar Group.

Bankers say that Indian firms are better-off as they are part of large groups. Take the deals that some of the Tata group companies have done. "If the individual companies were to do these deals, it would have been difficult for them. Lenders take comfort from the group,'' said a banker.

Analysts say Indian companies are facing opposition in certain sectors or assets that a country considers strategic. "Deals are still happening in IT; there are no issues. When it comes to a large strategic asset, you may face a challenge,'' said Essar's Rungta.

At the crossroads

Indian companies' acquisition attempts are being opposed by unions, aggressive rivals, former parent or targets
Fall in the stock values of Indian companies has affected their leverage and ability to fund M&As
Experts say fear of Indian companies playing the outsourcing card to produce goods cheaper at home may stall acquisitions
Indian companies will have to be more selective with acquisitions abroad