"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.