"ADAG dares RIL on open offer"

MTN Team In Mumbai To Start Due Diligence
Piyush Pandey & Bodhisatva Ganguli

THE WEEKEND saw no let-up in the latest round of the seemingly unending and relentless war between the Ambani brothers, with both sides readying their heaviest legal artillery. After the initial shock and awe of RIL’s sudden intervention, Anil Dhirubhai Ambani Group (ADAG) officials have adopted an aggressive posture. However, RIL shows no signs of yielding with company officials claiming that MTN would have to consider the legal implications of acquiring RCom. Seemingly undeterred by the controversy, an MTN team arrived in Mumbai on Saturday to start due diligence on RCom.

Speaking to ET on Sunday, a senior ADAG executive said Reliance Industries (RIL) can make an open offer if they are keen on buying Reliance Communications (RCom). The executive is involved in structuring the proposed $70-billion mega merger deal between Reliance Communications and South African Telecom giant MTN.

“If they want, they can make an open offer to buy RCom or go to the court. They will not do so or go to court because they are not interested in buying RCom, but their only interest is to sabotage our efforts to create a global telecom giant stretching from Asia to the Middle East and Africa with a subscriber base of 116 million,” said the executive.

“Besides, what is hurting RIL is that, if the deal goes through, the combined EBITDA of the combined RCom and MTN for 2009 would be Rs 45,000 crore, 50% more than RIL’s EBITDA of Rs 30,000 crore. Our deal is on track,” said the executive. Have to take note of our concerns,says RIL

WHEN asked for comments on RIL making an open offer to buy RCom or going to court to seek it’s right of first refusal, RIL’s official spokesperson declined to comment saying that RIL has not officially received any response from RCom or MTN for it’s letter. “It’s interesting that they have not responded to us even after 48 hours. As far as MTN is concerned, their board and all bankers involved will have to take note of concerns expressed by India’s largest private sector company,” an RIL source said.

In a statement issued to media on Friday, RIL had said, “RIL has in good faith notified both Anil Dhirubhai Ambani Group and MTN of the stipulations contained in an agreement, the validity of which has never been questioned so far by ADAG.”

When asked if RCom has received any communication from MTN asking for clarifications on RIL’s letter, the RCom executive said, “MTN was quick enough to respond to RIL’s letter. Within a couple of hours, MTN official spokesperson had said nothing has really changed and talks with RCom were on as per the 45 days exclusive talks agreement.” MTN officials could not be reached for their comments.

The issue came into the limelight after RIL wrote to MTN on Thursday threatening legal proceedings to enforce its claimed right of first refusal in the Bombay High Court, in which case, MTN would also be one of the defendants.

RIL’s letter to MTN was addressed to Cyril Ramaphosa,(non-executive chairman) and P F Nhelko (group president and CEO). The letter, a copy of which is available with ET said, “As you will note, we have already notified to ADAG that we shall adopt legal proceedings against them in the Bombay High Court in which we shall necessarily add MTN as one of the defendants.” “Please note that any agreement of the nature contemplated above between MTN and ADAG will result in MTN procuring a breach of the agreement, which shall entitle RIL to make a claim for exemplary damages against MTN,” said the letter.

The letter was written by RIL’s company secretary K Sethuraman and the copies of the letter were marked to the investment bankers involved in the deal such as Lombard Odier Darier & Cie, Newshelf664, Merill Lynch South Africa, Myrill Lynch, Lazard Limited and Deutsche Bank’s offices in the UK and Germany.

Commenting on the letter, the ADAG executive said, “As far as RIL going to the court is concerned, they may, but on what basis? On the basis of the January 12, 2006 agreement, which was unilaterally signed by RIL officials and which subsequently the Bombay High Court has ruled as ‘unfair and unjust’
in October 2007.” The ADAG executive also said that RIL had “jumped the gun” since no definitive agreement had been reached with MTN.

The crux of the younger Ambani’s case is that, the implementation of the MoU signed in July 2005 to execute the family settlement was done in a faulty manner. The MoU envisaged the creation of two groups — MDA and ADA. The MoU further said that the group companies would enter into various agreements such as right of first refusal, non-compete and so on. RCom officials allege that these agreements were in fact signed on January 12, 2006, when the future ADA companies (RCom, Reliance Energy, Reliance Capital) were still part of the original Reliance Group controlled by Mukesh Ambani. They were handed over to ADA only in February 2006. They say that agreements should have been signed only after ADAG was created. Instead, Mukesh Ambani entities had signed agreements with each other ignoring ADAG’s interests.

The same legal issue has taken centrestage in ongoing legal proceedings in the Bombay High Court, though the dispute here relates to the ADA Group’s right over gas supply to its power plants. A single judge bench has ruled that RIL could not sign binding gas supply agreements without first ensuring ADA’s rights. The case is now before a division bench. The government of India (GOI) has supported RIL’s right to sign gas supply agreements, saying that this was in the national interest. The division bench has not delivered a final verdict. Whoever loses is sure to go to the Supreme Court.

If the RCom-MTN case goes to the court, then, an opinion by the Attorney General of India relating to Balco, may also be of relevance. RCom officials reason there can be no restriction on ADAG’s right to sell its shares in RCom. More so, since the right of first refusal is not part of RCom’s articles of association.

Commenting on the validity of the agreement, an RCom spokesperson said, “RIL’s reference to an agreement dated January 12, 2006, is misleading, as ADAG has written to RIL the very same day, and rejected the unilateral procedure adopted for finalising such agreements as being illegal. Further, these were never incorporated in articles of association of ADAG companies.”

But RIL sources rubbish these contentions. “The master agreement of January 2006 was approved by the RIL board, of which, Anil Ambani was a very much a part. The agreement gave birth to ADAG. Further, the non-compete clauses of the same agreement is often used by ADAG to challenge and block many MDA initiatives. The latest such challenge was the plan to set up power plants in the Navi and Maha Mumbai SEZs,” a source said. “We get letters from them (ADA) every two weeks on something or the other, but we keep quiet. How can they now repudiate the agreement?” the source said.
Perhaps, its time for family matriarch Kokilaben to intervene once again.

"Tax sword hangs over Ranbaxy-Daiichi deal"

IN WHAT could play a crucial role in the Ranbaxy-Daiichi deal, ET has learnt that there is a clause in the agreement which says that the 34.8% holding of promoters will be sold through a stock exchange transaction. But this can only happen if the Ranbaxy share price touches a minimum of Rs 729 (Rs 566 on Friday) to sell the promoters’ stake at Rs 737 per share to Daiichi Sankyo. This is because Indian laws allow bulk deal transactions only at a price which is 1% more or below the market price or previous day’s closing price.

A stock exchange transaction will result in the promoters saving more than Rs 1,000 crore which they would have to pay if this was an off-market transaction. Unlike an off-market transaction which attracts a 10% long term capital gains tax, stock exchange transactions do not attract capital gains tax. The promoters will therefore hope that the Ranbaxy stock price reaches the magical Rs 729 figure before the transaction is executed. But that depends upon the movement of the Ranbaxy stock. It will decide whether the Singh family will transfer its 34.8% stake in Ranbaxy to Daiichi through direct off-market sale or through negotiated deals on stock exchanges.

Considering that the stock market has been going through a bear phase and the Ranbaxy stock on Friday reached its 3-year high level, legal circle sources are uncertain whether the Singh family will be able to conclude the proposed transaction through negotiated deals and thereby will be eligible for securities transaction tax. If not, the Singh family will have to sell its shares to Daiichi through a off-market deal, attracting huge tax liability.

“As it appears now the possibility of the Singh family ends up with paying huge capital gains tax is very high. Only advantage the family enjoys is that it has another nine months to consummate the deal,” said a legal source. When contacted, a company spokesperson said: “We cannot comment further on the deal.” It is however learnt that the company will opt for an onscreen transaction and wait for its share price to touch Rs 729 and execute the sale to adhere to the domestic market regulator Securities and Exchange Board of India’s (Sebi) rules. Plan B may be in place for off-mkt sale
“THE moment the share price touches the minimum level of Rs 729 per share, they will do the transaction on screen,” said a source.

An off-market transaction would invite a 10% basic capital gain tax, 1% surcharge and an additional 3% tax on the surcharge, a source said. But block deals done through stock market transactions will mean that Ranbaxy promoters will have to pay a nominal securities transactions tax (STT) of 0.125%. In addition, it will have bear some small costs such as broker’s fee and 12.5% service tax (on the broker’s fee), which could run into few crore, says a source

This could save the promoters from paying a total tax of around 11.3% or about Rs 1,053 crore. The promoters signed an definitive agreement to sell their entire 35% stake to Japanese company Daiichi Sankyo for Rs 9,578 crore on Wednesday.

But market watchers say Daiichi and the Singh family cannot wait indefinitely for the transaction to take place. Therefore, it is possible that there may be a Plan B which may involve off-market sale if the price does not reach Rs 729. While the official statement released by Ranbaxy and Daiichi on Wednesday said the acquisition (the stake sale plus open offer plus preferential allotment) will be completed by March 2009, Ranbaxy CEO Malvinder Singh at the press conference said he expected the transaction to be completed by December this year

Ranbaxy’s shares closed at Rs 566.90, up 4.31% from Thursday’s close of Rs 543.50, mostly driven by speculation by US major Pfizer is exploring the possibilities making a counter offer to buy the non promoters 65% stake. Meanwhile, several brokerages, post-Daiichi acquisition announcement, have either put an ‘underperformer’ or ‘sell’ rating on the pharma major.

For instance, CLSA’s fair price for the stock is Rs 525 after factoring in the change in plans regarding demerger of R&D wing which would add to research costs as also the strengthening of the balance sheet due to the preferential allotment to Daiichi Sankyo. It has given an ‘underperformer’ rating on Ranbaxy in the backdrop of no near term triggers for the stock.

"TRYST IN TOKYO LED TO DAIICHI, RANBAXY UNION"

Malvinder Went To Seek Ally For R&D Unit, Ended Up Selling Co

IT BEGAN with the Ranbaxy management looking for an investor for its R&D unit and ended with them finding a buyer for the parent company. And ironically, while Ranbaxy has been sold off, the new owners have decided to retain the R&D unit within the company.

The story goes that somewhere around March, Ranbaxy CEO Malvinder Singh and his COO Atul Sobti met with Daiichi Sankyo executives in Tokyo to explore the possibility of a partnership for its new drug discovery research (NDDR) business which it planned to demerge into a separate company. Like other Indian pharma companies Ranbaxy had announced that it had decided that it hive-off this unit and company executives were engaged in dialogue with several companies for an alliance in the R&D front.

But Daiichi had other ideas. It expressed its interest to buy into Ranbaxy. It was in the process of setting up a wholly-owned subsidiary in the country, headed by another ex-Ranbaxy executive D Vijendran The Japanese company planned to run a full-fledged operations in India and had long-terms plans for India. Ranbaxy has a strong presence in the Japanese generic market and Daiichi was aware of its strengths As Daicchi’s CEO Takashi Shoda said on Wednesday: “In India, we have only considered Ranbaxy as a prospective partner.”

It is learnt that Mr Singh was lukewarm to that proposal at that moment but when he came back to India he discussed it with his close confidants, including his younger brother and Fortis HealthCare CEO Shivinder Singh and Religare CEO Sunil Godhwani (who is also called the third pillar of the Ranbaxy promoter group). Both of them were of the view that Daiichi’s proposal could be examined and not be dismissed outright.

And so discussions began silently and at the highest levels. From Ranbaxy’s side, Mr Singh and Mr Godhwani led the negotiations and it is believed that even Mr Sobti, the second highest ranking Ranbaxy executive after the CEO, was not kept completely in the loop. “Malvinder kept his cards close to the chest,” said a company insider.

From Daiichi’s side, apart from its CEO, a key figure involved in the discussions, was the company’s board member, global strategy, Une Tsutomu. The Japanese company was advised by Nomura Securities Nomura had earlier in India advised Mitsui to pull out of $700 million Sesa Goa by selling stake to Sterlite and was also part of the consortium which helped Sterlite raise $1.2 billion ADS two years ago. As negotiations moved ahead, few senior executives had a sense about ‘some discussions’ but believed that the talks were for a strategic alliance.

Ranbaxy share prices perked up

HOWEVER, a couple of weeks before the announcement, few key executives and select board members, including ex-Ranbaxy CFO and an old Parvinder Singh-loyalist Vinay Kaul, were informed about the promoters plan to sell their entire stake.

Meanwhile, the Ranbaxy share price started going up. Whether by sheer coincidence or because of positive news flow, the company’s stock price shot up by 28% from Rs 443 on April 1 to Rs 568 on June 9, a day before the deal was announced. The rising scrip price would have definitely strengthened the negotiating position of the sellers.

Of course, Daiichi was not the only company that wanted to buy out Ranbaxy. Unconfirmed reports suggest that last year the company had rejected private equity giant Carlyle’s proposal to buy it out. GSK, too, is learnt to have proposed a buyout at a higher price than Daichi. Ultimately, the promoters did not sell-out to the highest bidder. They chose a buyer who would ensure continuity in management, provide a better fit, and not destabilise operations