"It’s Talk Time: RCom and MTN scribble share-swap fineprint"

Kausik Datta and Bodhisatva Ganguli MUMBAI


RELIANCE Communications’ (RCom) Indian minority shareholders may get the option to swap their shares with MTN at the same rate as its promoters, the Anil Dhirubhai Ambani Group (ADAG). Minority shareholders will of course have the conventional option of encashing their holding in RCom by participating in the open offer that may be launched by MTN.

This is one of the possibilities that RCom is weighing as it tries to strike a deal with MTN which, if successful, will create an entity with combined market capitalisation of $66 billion and with a presence in 23 countries. This is in line with RBI’s norms which allow spending of $50,000 by an individual in foreign markets a year. Indian minority shareholders hold 23% in RCom while foreign investors control of 11% stake. ADAG holds 66% equity in the country’s second largest private wireless telephone company.

Sources close to the development said a clearer picture of the deal has emerged in the past four days after the parties engaged in hectic parleys. MTN, sources say, they would sign an agreement to buy up to 74% in RCom — the maximum permissible foreign equity holding in an Indian telecom company. The proposed transaction involves two steps. The first step would a mandatory open offer for 20% for the minority shareholders. In the next stage, depending on the response to the open offer, Mr Ambani will swap his shares in RCom for MTN shares, enabling the latter to reach 74%.

This can be better explained with an example. Consider two extreme cases — one where the entire lot of foreign investors of RCom (11%) opt for the MTN open offer, and two when they stay away from it but the offer receives subscriptions from the Indian minority shareholders. In the first case, MTN’s holding in RCom, post the open offer, will be 11% and therefore, Mr Ambani will need to swap 63% of his RCom stake in MTN shares to enable the latter to reach the 74% FDI limit. The second scenario would help MTN end up with 20% stake, post the offer, while the existing foreign investors would continue to hold 11%. In this case Mr Ambani would exchange his 43% stake in RCom to get MTN shares. If there is no response to the open offer Mr Ambani would also swap a 63% stake in RCom to enable the latter reach 74%. In other words, MTN would end up getting between 63% and 74% of RCom equity, including the open offer, and Mr Ambani would give away anything between 43% and 63% stake in RCom to get MTN shares.

Ambani may pick up 34% in MTN

DEPENDING on the share-swap ratio, Mr Ambani is expected to pick up a 28-34% stake in MTN. But he would be by far be the single largest shareholder in MTN. He would not cross the 35% mark as Johannesburg’s rules demand an open offer beyond this figure.

Newshelf 664 is the largest shareholder of MTN with a 13.1% stake. The Beirut-based Mikati family holds 10.2% while PIC has a 9.7% stake. The rest 67.1% is widely held. Post the deal, the holding of these shareholders will come down as the equity capital of MTN will expand on account of issuance of new shares to the RCom shareholders and ADAG.

Some people feel that the share swap option may not elicit a good response from Indian minority shareholders. “It is difficult to expect many takers for the share swap offer. And frankly speaking, there is no reason why a minority shareholder should be attracted to trade on the Johannesburg Stock Exchange where MTN is listed,” said a banker. Some others, however, believe that the option may lure some investors. “Minority shareholders have invested in RCom because they believe in the company’s promoters. Now one does not know whether they would like to tag along with the promoters to Jo’burg as well,” said an analyst.

However, those who are not interested in the share swap would have the liberty to sell their shares in the MTN open offer. MTN will issue fresh shares to those who want to swap their holding in RCom, including Mr Ambani. The broad contours of the deal thus indicate that Mr Ambani will emerge as the largest shareholder of MTN and RCom will be it’s subsidiary , as reported in ET earlier.

"Ambani vs. Mittal: The battle continues overseas "

Joji Thomas Philip NEW DELHI


ALL determinate situations can be turned to advantage,” explains classical Chinese warrior philosopher Tsun Tzu in his ancient book ‘The Art of War’.

R-ADAG chairman Anil Ambani, a self-avowed practitioner of Tsun Zu’s war strategy has taken a leaf out of the ancient Chinese classic in the MTN saga. Two days after Bharti announced that its negotiations with MTN had failed, Mr Ambani’s Reliance Communications (RCom) on Monday said that it had entered into exclusive talks with South African mobile firm to discuss a “potential combination of their businesses” to “achieve unique global platform for exponential growth”.

Whether RCom entered into negotiations with MTN once talks with Bharti had failed or whether it was its eagerness to explore all options with MTN which resulted in the South African company refusing to budge from its position that Bharti Airtel become a subsidiary, thereby resulting in the collapse of talks between the two is a matter of conjecture. But one thing is clear. The battle between the India’s two largest private mobile operators has spread from the corridors of Sanchar Bhawan to the domestic market place to foreign shores as well.

If RCom were to pull off a merger with MTN, it would create a global telecom giant with close to 120 million subscribers that has a footprint stretching from the Cape of Good Hope to the Himalayas across 23 countries and covering a population of two billion, a third of the world. Besides, an RCom-MTN combine will have the largest WiMax footprint globally covering 50% of the world’s population. The combine will also command a market cap of over $65 billion, have revenues to the tune of $14.4 b, an operating profit of over $6 b and assets worth $26.8 b, and emerge as the second most profitable operator in emerging markets after China Mobile. This will more than dwarf Bharti which currently has a market cap of a little over $40 b with 65 million subscribers with no major presence outside India.

Round One was won by RCom

The RCom vs. Bharti battle is nearly a decade old — while Mittal was earlier pitted against Mukesh Ambani for the last three years, he has been fighting the younger brother Anil on the telecom front. While Bharti Airtel is currently miles ahead of over all its rivals, including RCom, the tables had turned only two years ago. In 2005, RCom (then called Reliance Infocomm) not only managed to dislodge Bharti from its market leadership position, but nearly pushed Mr Mittal to the edge. So much so that even Mr Mittal admitted at the height of the WLL crisis in 2002, Battleship Bharti was a “machine that was creaking”. Infocomm’s entry forced Mr Mittal to invest beyond his company’s means, and the policy googly from the government, which allowed players such as Reliance which held WLL licences to offer full-fledged mobile telephony left Bharti a tad vulnerable, financially and strategically. The pace of Infocomm’s national rollout, coupled with cheaper tariffs and handsets saw the company shoot past Bharti in subscriber numbers.

Round Two went to Bharti

Trade analysts predicted that Bharti would fold up as it could not match Infocomm in either subscriber numbers or tariffs. Instead, Bharti recorded its first quarterly profit of Rs 23 crore in March 2003 and its first full year profit in FY04. Bharti reduced tariffs gradually, harped on the superior quality of services, roped in SingTel as an investor, and launched its now famous outsourcing model. Network management went to Nokia Siemens and Ericsson, IT to IBM and call customer related activities were outsourced to global BPO majors.

Infocomm, on the other hand, was plagued by glitches in its first 24 months of operations. From widespread billing problems leading to customer dissatisfaction, to trouble with the law for illegal routing of international calls and a down market image, Infocomm’s first two years were mired by problems of various hues, which played into Bharti’s hands.

And so, after being behind in the race for subscriber numbers for nearly three years, Bharti drew level to Reliance. The figures explain better: In Q3, FY 06, Bharti had 16.3 m against Reliance’s 17 m; and in Q4 of FY 06, Bharti had 19.6 m against Reliance’s 20.2 m. However, in Q1, FY 07, Bharti raced to the lead with 23.1 m wireless users compared with Reliance’s 22.5 m base. Since then Bharti has pulled ahead month-after-month to command a towering lead — it currently has a subscriber base of about 65 m which is 17 m ahead of Reliance Communication’s CDMA and GSM arms combined.

RCom comes back fighting

But RCom under Mr Ambani, with a change in management and a new brand identity quickly sorted out all problems that plagued the company and quickly reemerged as the primary competitor to Bharti. If the company had bagged Hutch in February 2007, the CDMA major would have had over 50 m subscribers and close to a 40% market share, way ahead of Bharti with 30 million subscribers. Mr Mittal played his part in providing the no-objection certificate to Vodafone, which enabled the UK-based telco to outbid RCom and gain a controlling stake in Hutchison Essar.

Spectrum wars

Mr Ambani and RCom hit back hard again late last year. Catching the GSM industry off guard, the department of telecom approved the use of dual technology where telcos can offer both GSM and CDMA services under the same licence. Even before the policy became public, RCom got the DoT nod to offer GSM services based on its applications it had filed in GSM licence in February 2006. GSM operators led by Bharti went all out to defend their turf and said that RCom’s applications for GSM were invalid. But their lobbying and legal challenges failed to yield the desired results.

At the same time, Mr Ambani accused GSM players of trying to hoard spectrum and limit new competition, in addition to resorting to anti-consumer practices, such as cartelisation and price fixation. Even as GSM operators were engaged in proving that they were entitled to spectrum 6.2 MHz, the impasse allowed Mr Ambani to open a third front in the battle for airwaves. RCom along with the Tatas campaigned for enforcing a Telecom Engineering Centre’s recommendation which said that GSM players should increase their subscriber base between 6 to 15 times before they are given additional spectrum. All of Mr Mittal’s efforts to get the DoT to roll back the stringent spectrum allocation norms came to naught. While Bharti and other GSM players were fighting numerous court battles, RCom used this break to plan its GSM rollout. RCom emerged victorious with a pan-India GSM licence and start-up GSM spectrum.

Bharti refuses to bailout RCom

Both companies were involved in another standoff recently when three undersea cables — FLAG and FALCON, owned by RCom, and the Se-Me-We-4 cable on which both Bharti and VSNL have capacity — were damaged near West Asia. Bharti and VSNL were able to minimise the impact and route traffic within a few hours through their other cables — Bharti through i2i and VSNL through the Tata Indicom cable and Se-Me-We-3 cables. RCom, the worst affected had alleged Bharti and VSNL had failed to provide it with additional capacity. Bharti and VSNL had refused to budge despite RCom running to the government and the regulator. Instead, Bharti sources said that RCom was attempting to cover up its poor planning and unwillingness to pay a commercial price for its mistakes by making this a national issue. While Bharti’s move to buy capacities on many different cables paid off, RCom stood exposed.

"FRESH START EXCLUSIVE TALKS HAVE BEGUN"

MTN may’ve to make open offer to RCom investors

Kausik Datta & Bodhisatva Ganguli MUMBAI

THE proposed deal between Reliance Communications (RCom) and MTN may involve an open offer by the South African telco to the shareholders of RCom. The broad contours of the deal, on which both the parties began exclusive talks on Monday, may result in the transfer of Anil Ambani’s two-third equity stake in RCom to MTN’s shareholders against his acquisition of around one-third equity in the foreign company. Under Indian law, any acquisition above 15% triggers a mandatory open offer for a further 20% stake for minority shareholders.

In the two-step structure being discussed, MTN will become the holding company of RCom. But Mr Ambani will, in turn, have a direct one-third equity stake in MTN and an indirect holding of nearly 20% in RCom.

In effect, the Anil Dhirubhai Ambani Group (ADAG) will become the largest shareholder of the combined entity, which is likely to be christened MTN Reliance. His holding in RCom will marginally go up if the follow-on open offer succeeds, said sources. The proposed transaction between ADAG and MTN will be a share swap while the offer to minority shareholders will be obviously in cash. There is however no certainty regarding any of this given the regulatory complexities involved.

The deal would need approval from the Indian and South African authorities as well as from 21 other counties where MTN is present.

RCom on Monday announced before the Indian markets opened that it has begun ‘exclusive’ talks with MTN in what could result in the creation of the world’s fourth largest wireless telephone operator with a subscriber base of over 116 million in 23 countries. MTN also separately confirmed the development, barely two days after the country’s largest telco Bharti Airtel withdrew from similar negotiations with MTN, blaming the latter’s management for not honouring its initial agreement. ET had reported on Monday (26 May) that a formal announcement was likely on that day.

Considering RCom’s market capitalisation of $28 billion, a twothird stake would cost around $18 billion, while one-third of MTN’s equity is valued at $12 billion. However these calculations are at current levels of market capitalisation. In reality, Mr Ambani is likely to ask for a substantial premium for his stake. MTN in turn will surely seek a premium in return for ADAG becoming the single largest shareholder with management rights. It is also not clear if ADAG will transfer its entire 66% stake to MTN or a large chunk of it. Sources close to the transaction say that no debt is involved. The uncertainty in all this is whether Mr Ambani will eventually agree to a structure that Sunil Mittal’s Bharti Airtel turned down. Mr Ambani is on a holiday with his family, coincidentally in South Africa, and may meet MTN’s top-brass shortly. RCom faces uncertainties with MTN deal

“HE LEFT for South Africa on Saturday and is likely to be back this weekend,” sources said. A senior ADAG official was in London last week where he is believed to have met MTN representatives.

The other major source of uncertainty is that Mr Ambani’s control over the proposed combined entity will be eventually dependent on an entity that is listed on the Johannesburg Stock Exchange. That would expose ADAG to South African political risk. Though this does not impact RCom’s minority shareholders, Mr Ambani will have to take a call if he is comfortable with this situation. Further, MTN is present in Iran and Sudan, countries that the US does not view with favour. It’s not clear if this issue will be a deterrent for RCom which has operations in the US.

Mr Ambani & Co have to woo the MTN chairman Cyril Ramaphosa and its CEO Phuthuma Nhelo, in addition to Azmi Mikati, a prominent shareholder, to tweak the deal in his favour before the exclusive agreement expires in 45 days. So it’s expected that a series of meeting between them will take place shortly.

Another problem that RCom may face is that MTN will ask for a premium over the price quoted by Bharti. Also it’s not clear if becoming the single largest shareholding will translate into management control or whether that will have to be shared with MTN’s current management. “Bharti has already set the benchmark on issues like pricing, representation on the board, chairman and CEOship etc. Now MTN will ask for something more,” he said. MTN has already set the tone by informing the Johannesburg stock exchange that “it was approached by RCom”, an unusual revelation at this stage of the transaction. It said there is no certainty that the discussion with RCom will result in a transaction.

Mr Ambani, in a press statement, said on Monday: “We are delighted to be engaged in exclusive negotiations with MTN to achieve a partnership, which would provide investors customers and the people of both companies a unique and global platform for exponential growth, creating substantial long term shareholder value.” The exclusive arrangement means MTN will not talk to any other suitor in the next 45 days.

RCom’s stock on Monday slipped 5.1% to close at Rs 543.20 on fears of that it will be an expensive deal for the company. Bharti stock recovered 3.25% to close at Rs 863.15. If the deal goes through, it will create the world’s fourth largest telco after China Mobile, Vodafone and China Unicom. It will cover 23 countries with 183 million subscribers.