Thursday, June 26, 2008

"ADAG moves court to save MTN deal"


SAFE THAN SORRY

Group Cos File Caveats To Stop RIL From Blocking Transaction



THE war of words between the Ambani brothers over RCom’s proposed reverse merger with MTN may now reach the courts. Two companies of the Anil Dhirubhai Ambani Group (ADAG) have filed caveats in the Bombay High Court, which are intended to ensure that no ex-parte order was issued in case Mukesh Ambani’s flagship Reliance Industries (RIL) attempts to enforce its claimed first right of refusal in case of the MTN deal. Sources close to the development said Reliance Communications (RCom), which is in talks with MTN to create one of the world’s top telecom companies, and another company AAA Communications have filed the caveats in the Bombay High Court last week. ADAG’s investment arm AAA Communications holds 63% stake out of the group’s 66% stake in RCom.

The bone of contention between the Ambani brothers lies in RIL’s claim that it holds the right of first refusal in case RCom is sold to any third party. RCom denies any such right. RIL sources say that ADAG has repeatedly sought to enforce this right in case of various initiatives by RIL and by Mukesh Ambani and his associates.

Although MTN has maintained that the sibling rivalry between the Ambani brothers will not have any impact on its talks with RCom, experts said the deal may face the threat of getting delayed by legal proceedings. “This threat may have an impact on the share-swap ratio,” said a source, adding that MTN is now scrutinising the legal implication of RIL’s claim. However, this could not be independently verified with MTN.

It is learnt
that Anil Ambani is expected to visit London to give final touches to the proposed deal. Ken Kosta, Lazard’s head of Europe, is leading the ADAG effort on this deal from his London office. If the deal goes through, it will create a telecom company with a combined subscribers of 115 millions in Asia, Africa and the Middle East. The broad contours of the deal being discussed between the South African telco MTN and RCom indicate the ADAG will emerge as the largest shareholder of the Johannesburg-based MTN, while RCom will become the subsidiary of MTN. If the deal goes through, ADAG is expected to get nearly one-third stake in MTN by swapping his shareholding in RCom. He may chip in a few billion dollars to top up his offer, depending on the share-swap ratio between the two companies. Ambanis square off yet again

THE exact details of the deal have not yet been finalised. Both the parties have signed an agreement to hold ‘exclusive talks’ till July 8.

The animosity between the Ambani brothers is nothing new. They parted ways in June 2005 after one of the prolonged and most bitter battles in the history of corporate India. Since then, both the brothers have grown their business manifold and have displayed a habit of obstructing each other’s expansion plans. RIL sources claim that this propensity has mostly been exhibited by ADAG which has repeatedly objected to various initiatives.

However, this round of battle was initiated by RIL, which two weeks ago sent a letter to MTN claiming that it enjoys the first right of refusal in case RCom is sold. RIL’s claims are based on a disputed agreement with three entities of ADAG on January 2006. RIL had also sent the same letter to RCom a day later. The January 2006 agreement was to implement the demerger of businesses between the brothers.

RCom immediately come down heavily on RIL. In a communication, which was public within a day after getting the RIL’s letter, RCom had said: “ The tone of the letter clearly indicates that it is part of a mala fide design, with no substance, to simply try and disrupt talks between RCom and MTN, by raising the false bogey of litigation and damages. The use of threatening and coercive language by RIL, India’s largest private company, with MTN, a globally respected telecom major, is very unfortunate.”

RIL had earlier said: “It has in good faith notified both ADAG and MTN of the stipulations contained in an agreement, the validity of which has never been questioned so far by ADAG.”

"Modis to exit, TM to get 15% in merged entity"




IN ONE of the biggest deals in the Indian telecom sector, Aditya Birla group’s Idea Cellular on Wednesday announced that it would acquire BK Modi’s Spice Communications to strengthen its position in the growing telecom market. The deal consists of four related but distinct transactions. Idea will acquire the Modis’ 40.8% stake in Spice to begin with. Subsequently Idea will launch the mandatory 20% open offer for the Spice shareholders jointly with Telekom Malaysia’s investment arm TMI (Telekom Malaysia International).

Later, Idea will merge Spice with itself and offer a 14.99% stake to TMI through a preferential allotment. Idea will earn Rs 7,294 crore ($1.7 billion assuming an exchange rate of Rs 43) by selling this stake to TMI. This would make it one of the largest infusions of FDI into India.

Idea has agreed to buy the Modis’ 28.14 crore shares for Rs 77.30 each, totalling Rs 2,176 crore. In addition, it will also shell out Rs 544 crore, or over Rs 19 a share, to the Modis as non-compete fee. This is under the 25% limit (with reference to the open offer price to non-promoter investors) prescribed by the market regulator Sebi for any such payment. The 14.99% preferential allotment to TMI will ensure that Idea, despite being the purchaser, ends up as a net gainer in the transaction. The net income for Idea, after making payment to the Modis, will be Rs 4,574 crore.

The Idea-TMI combine will launch the open offer at Rs 77.30 jointly with TMI, which now holds 39.2% stake in Spice. It is not clear who will pick up how much at this stage. Idea will earn Rs 7,294 crore by selling 46.47 crore preferential shares to TMI for Rs 156.96 apiece. According to the merger formula, Spice shareholders will get 49 Idea shares for every 100 shares they held. The payment to the Modis is being funded through internal accruals. After the deal, which is expected to be done in the next six months, Idea’s equity base will be expanded due to issue of fresh shares to TMI and the share swap.

ET first reported on June 10 that Spice shares will be acquired by Idea at between Rs 77 and Rs 78 per share. On June 12, we reported that TMI will buy just under 15% stake in Idea through preferential offer and will hold about 20% in the merged entity. On Wednesday, Idea scrip closed at Rs 102.05, up 2.92% while Spice scrip touched an all-time high of Rs 73.40 before closing at Rs 72.35. This is a whopping 33% gain over the previous day’s close.

“Spice will be delisted and TMI’s holding in the new Idea (post-merger) will be a maximum of 20% (depending on the response to the open offer) and one non-executive board seat,” AV Birla group chairman Kumar Mangalam Birla told ET. The management of the merged entity will be with the

Birla group, which will have between 46%-48% in the company post the transaction. The 40.8% stake in Spice Telecom being acquired by Idea from the BK Modi Group will be cancelled post the transaction. The deal makes Idea virtually a debt-free company because of the net gain of around Rs 4,500 crore from the deal. Around Rs 2,700 crore was raised by selling stake in Indus Towers to Providence Partners last month. “With this, we become a debt-free company and Idea takes on a high-growth trajectory,” Mr Birla said.

Idea to enter Karnataka

DSP Merrill Lynch acted as the financial advisor to Idea while Enam Securities worked for Modis. Lazard was the financial advisor to TMI.

Idea Cellular MD Sanjeev Aga told ET the deal will give Idea an entry into Punjab and Karnataka, where Spice is present and which accounts for 11% of India’s total wireless subscribers. Spice has 4.4 million subscribers. With a total of over 31 million subscribers post-merger, Idea will be the fifth largest operator in India, ahead of Tata Teleservices (TTSL) which has nearly 26 million users.

It will also consolidate Idea’s position, with its all-India market share increasing from 9.5% to 11.1%. Idea is close to launching operations in Mumbai, Bihar, Tamil Nadu and Orissa in the next four-five months. With Punjab and Karnataka coming into its kitty through the deal, Idea will have almost a nationwide footprint spanning 17 key circles.

Also, Spice has spectrum in the 900 mhz GSM band, which carries more subscribers than the 1,800 mhz band. Idea already has spectrum in the 900 mhz band in seven circles areas, which will increase to nine, driving scale economies and operational synergies. “This will result in lower operating and capital expenditure,” said Mr Aga.

TMI has 44 million users across 10 Asian markets. “TMI’s experience of operating 3G will be of value to Idea, as also the convergent interests of the two companies in areas extending from international traffic to roaming and mobile value-added services. Idea and TMI would sign a business co-operation agreement to this effect,” Mr Aga said.

Spice group chairman BK Modi said, “This divestment will enable Spice to redeploy resources and strengthen the group’s mobile ecosystem businesses led by mobile VAS, mobile devices, telecom retail and customer support. This transaction makes Spice an operator agnostic services provider, where we will continue to provide services to the Indian mobile telephony market.”

"IDEA ADDS SPICE"


HOW DOES THE DEAL CHANGE THE TELECOM LANDSCAPE?

India will now have 11 telecom operators instead of 12 & the pecking order will change. Idea set to become the fifth-largest operator with over 31 million users. It is now just 5 million subscribers away from BSNL

WHAT DOES IT MEAN FOR IDEA CELLULAR?

AV Birla Group co gets a foothold in Punjab and Karnataka, 4.4 million subscribers, a strategic investor in Telekom Malaysia and a net income of Rs 4,500 crore.

Idea turns a debt-free company WHAT HAVE MODIS AND SPICE SHAREHOLDERS GAINED?

Modis made a cool Rs 2,720 crore by selling stake in the loss-making venture. This includes a non-compete fee of Rs 544 crore. Spice shareholders get 49 shares in Idea for every 100 shares held

HOW DOES TELEKOM MALAYSIA INTERNATIONAL BENEFIT?

It becomes a strategic investor in the 5th-largest operator in the world’s fastest-growing telecom market. TMI has 44 m users across 10 countries; Idea adds 31m to that. TMI will have one member on the new Idea board

DEAL DYNAMICS

STEP 1
Idea to acquire the Modis’ 40.8% stake in Spice

STEP 2
Idea to make 20%open offer for Spice jointly with TM

STEP 3
Idea to merge Spice Comms with itself

STEP 4
TM to buy 14.99% in merged co via preferential issue