"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.