"Now, RCom & MTN may talk alliance"

R-ADAG Likely To Become Largest Shareholder In Combined Entity
Joji Philip Thomas, Javed Sayed & Rashmi Pratap
DELHI/MUMBAI


EXIT Bharti Airtel. Enter Reliance Communications. South Africa’s MTN and Anil Ambani-owned RCom may shortly announce that they are in exploratory talks for an alliance. According to banking sources, discussions between the two began late last week. MTN has offered RCom a structure similar to the one that Bharti turned down. It is believed that one of the proposals under consideration is for the RADAG group to transfer its 66% shareholding in RCom to MTN and in exchange become the largest shareholder in MTN with a 34% stake. This scenario will also involve making RCom a subsidiary of MTN. In the case of the now aborted Bharti-MTN deal, the Mittal family and SingTel had been offered a 51% stake in MTN for exchange of their shares to MTN as Bharti’s market capitalisation is larger than RCom’s.

When contacted, an RCom spokesperson declined comment. A source familiar with the group said reports about concrete discussions on any particular structure were premature. “Till late last week, MTN and Bharti were engaged in talks. Even though the R-ADAG group is known for its dealmaking capabilities, even by their standards this will be very fast,” he said.

Nevertheless, some industry sources say some kind of announcement is imminent and indeed it may happen as early as on Monday. “MTN would like to make an announcement soon as it would not like its stock price to fall following the collapse of its discussions with Bharti,” said a source. An MTN spokesperson on Saturday said his company would update shareholders as the market opens on Monday morning. The market, in this case, being the Johannesburg Stock Exchange. It remains to be seen whether the RCom management will agree to make their company a subsidiary of MTN in exchange for becoming the largest shareholder in the South African company.

While Bharti has denied that India’s FDI regulations were a stumbling block in their discussions with MTN, sources say the 74% FDI sectoral cap would have made it difficult for MTN to merge into Bharti. “Unlike Bharti, where direct and indirect foreign holding is around 74%, foreign shareholding in RCom is just over 10%. This gives RCom much more leeway to explore merger-related structures,” said a source.
Of course, RCom may not be the only suitor for MTN. It has been reported earlier that Russian telco Vimpel Communications, European major Deutsche Telecom and UAE’s Etisalaat may also be in the race.

RCom is India’s largest CDMA operator with a subscriber base of over 40 million. While its presence in the GSM space so far is confined to only eight circles with just a over seven million subscribers, it has ambitions of aggressively expanding in the GSM segment and has secured licence to roll out GSM operations on a pan-India basis. It had last year made a bid to buy Hutchison’s stake in Hutchison Essar but had lost out to Vodafone.

Analysts feel that synergies between RCom and MTN may not be as strong as it was between Bharti and MTN, given that RCom is still a relatively small player in the Indian GSM space.

"What went wrong with Bharti’s S African trip"

Joji Thomas Philip & Javed Sayed NEW DELHI


IT WAS supposed to be a done deal. The Bharti Airtel board was to meet on May 25 in London to ratify the merger of MTN with itself, thereby creating the world’s sixth largest telecom company. It had been decided that a formal announcement would be jointly made on May 27 (Tuesday) as Monday is a bank holiday in London. The champagne was on the ice.

But the script went awry on May 21(last Wednesday) when instead of approving the merger, the MTN board came back with a counter-proposal, which would have resulted in the Indian company becoming a subsidiary of MTN. The South African company’s board had also demanded that its shareholders be given the majority shares of Bharti Airtel held by the Bharti family and SingTel in exchange for a controlling stake in MTN. These terms were unacceptable to Bharti and while negotiations continued till the early hours of Saturday, the deal could not be salvaged. So, what went wrong? Why did the MTN board reject a proposal that its management had earlier agreed and when a term sheet had already been signed? While there is no official confirmation, a source close to the discussion says that it was largely the reluctance of MTN chairman Cyril Ramaphosa to give his approval to the merger, which resulted in the board rejecting the proposal.

Besides being a successful businessman, Mr Ramaphosa is a prominent South African political figure. There has been speculation that he may emerge as a compromise presidential candidate when president Thabo Mbeki’s terms ends in 2009. While Jacob Zuma, South Africa’s most controversial politician, is slated to succeed Mr Mbeki, many political watchers believe Mr Ramaphosa may emerge as a consensus candidate, given the reservations about Mr Zuma in various circles.

“Mr Ramaphosa was uncomfortable with a merger that would have resulted in MTN getting folded in Bharti. He does not mind if the ownership of MTN changes but for political reasons, he wants the company to continue to exist,” said the source. Another factor that may have gone against Bharti is the emergence of other suitors including its bitter local rival Reliance Communications. Even as Bharti was turning down MTN’s offer to become its subsidiary, MTN’s financial advisors Merrill Lynch and Deutsche Bank are learnt to have approached RCOM who expressed its interests in discussions. This may have given MTN the impression that it has options apart from Bharti.

RCOM apart, it has been reported that Germany’s Deutsche Telekom, Russia’s VimpelCom, China Mobile and the Emirates Telecommunications Corporation (known as Etisalat) were also charting plans for a possible bid, a move that could have raised the valuations of the company significantly. A bidding war can push MTN’s valuations to close to R180-R200 per share, which raises its market cap to $50 billion. This is a more lucrative option since discussions between Bharti and MTN had begun in March where a reference price of around 160 rand per share (the then market price of MTN was less than 130 rand) was agreed upon. In addition, there are other factors that may have contributed to the collapse of the talks.

According to industry sources, a Bharti-MTN merger would have faced a major regulatory hurdles on the FDI front. “The merger would have meant that foreign holding in Bharti Airtel would have reached around 85%. While Bharti executives had told MTN that they would be able to get the FDI sectoral cap waived, the feedback that the MTN directors were independently receiving was that it would be difficult for the sectoral cap to be relaxed,” said an industry source. Bharti, on its part, maintains that it had enough leeway to give MTN shareholders equity in Bharti within the 74% limit.

Another factor that is being cited is that important shareholders such as SingTel and Temasek were not happy with the arrangement. But a source close to the discussion says the SingTel board was scheduled to discuss and approve the merger before the MTN board meeting threw the spanner in the works.

So far, MTN has not spoken about why discussions fell through. While it has said it will make a statement on Monday, industry sources say Bharti issued a statement on Saturday as it wanted to make its position public. Whatever may be the reason, the fact remains that collapse of the talks must be hard news for the Bharti management to accept.