"Kingfisher may buy Spicejet in cash deal"

Mallya in talks to buy out Kansagra family & Istithmar. Open offer for 20% to follow

ANOTHER round of consolidation in the domestic skies looks imminent, with UB Group chairman Vijay Mallya engaging in talks with two major shareholders of SpiceJet to buy out the budget carrier in an allcash deal. According to industry sources, the Bangalorebased tycoon is negotiating with Gulf-based fund Istithmar and UK-based Bhulo Kansagra family, who together hold 26.33% in the low-cost airline. The acquisition of their stake by Mr Mallya would trigger an open offer for another 20% from other shareholders.

The Kingfisher chief followed the same strategy to acquire the country’s largest low-cost airline, Air Deccan, last year. Now, the budget carrier is being merged with Kingfisher. Going by the current share price of SpiceJet on BSE, a 26.33% stake in the company is valued at Rs 158.40 crore. The SpiceJet share closed at Rs 25 on Friday, up 7.76% over the previous day.

The Tatas also hold a minor stake in SpiceJet through two investment companies. There was speculation that they may take a larger role in the airline but the group nixed the buzz by insisting that the holding is purely a financial investment.

“Kingfisher has been in talks with SpiceJet for a possible stake acquisition for a month now. The Kansagra family and Istithmar are likely to exit the company. While Mr Kansagra is keen for an early deal, Istithmar is looking for good value,” an industry source said. Meanwhile, SpiceJet is also talking to a non-aviation investor for infusion of fresh funds, the source added.

Gurgaon-based SpiceJet has cut down its flights to 94 per day from 117 a day last month. The airline is not immune to the impending financial crisis in the aviation industry due to spiralling fuel prices. In a move to reduce losses, the low-cost carrier is reducing capacity in the market and sub-leasing aircraft. It has already sub-leased one aircraft to the Netherlands-based Trasavia Airlines. SpiceJet is planning to sublease two more aircraft shortly.

Kingfisher, along with low-cost arm Deccan, operates about 83 aircraft and operates 440 flights a day across the country. SpiceJet, which has nearly 11% market share, operates 94 flights a day with 15 Boeing aircraft. To expand its fleet and operations, the budget carrier is planning to raise $100 million from the market. While it has been looking for an investor for the past few months, it hasn’t yet got any.

With fuel prices at an all-time high, almost all domestic carriers are reducing capacity. Indian airlines, which lost about $1 billion last fiscal, are expected to double the figure in the current fiscal.

Mr Mallya’s move to acquire SpiceJet is expected to give Kingfisher enough muscle in the domestic market. If the deal goes through, the UB Group will hold a 40% share in the domestic market and set fare levels across key sectors.

"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.

"RCom looking to buy direct 40% stake in MTN"

ANIL Ambani’s Reliance Communications (RCom) may be examining alternative structures to bring about its proposed mega combination with MTN. RCom, possibly in partnership with a sovereign wealth fund based in the Middle East, may directly buy a large equity stake in MTN, emerging as the single largest shareholder. This is to avoid legal disputes that may arise from Reliance Industries’ (RIL) claims of right of first refusal (RoFR) if RCom were to enter into a reverse merger with MTN. Under the reverse merger route MTN would have made an open offer for RCom followed by a share swap between Reliance ADAG, promoters of RCom, and MTN. ADAG would then have emerged as the single largest shareholder of MTN while RCom will become subsidiary of MTN.

That plan has not been junked, but sources close to the development said RCom is also examining the option of directly acquiring a 40% stake in MTN. A Middle East-based sovereign wealth fund could join hands with RCom for the acquisition of the controlling stake in MTN. The name of the fund could not be ascertained. Since the South African stock exchange rules require any acquirer to launch a tender offer if its holding crosses 35% stake in a company, RCom intends to acquire a shade lower than the threshold limit. Subsequently, RCom is looking at a “whitewash” procedure under which MTN’s shareholders will be asked to vote to waive their right to a tender offer. If the shareholders agree, RCom will scale up its stake to 40% in MTN.

Otherwise, it will be contend with a stake just under 35%. However, RCom will emerge as the single largest shareholder by far with its 35% stake. Newshelf 664, a trust, is currently the largest shareholder with its 13% stake.

A 35-40% stake would however mean there would be no consolidation of revenues and profits in RCom’s books though there may be other synergies.

Industry officials said MTN could be valued at $35-40 billion against its ruling market capitalisation of nearly $30 billion for the transaction. So, RCom will have to chip in $12-14 billion for the purchase of 35%. Its fund requirement will go up if the MTN shareholders allow it to acquire another 5% stake.

The transaction may be routed through a special purpose vehicle in which RCom will hold majority control with the sovereign fund holding the remaining stake. SPV will raise debt too

In addition to the foreign fund’s equity contribution, the SPV will raise debt to finance the deal. So, the pressure of funding the deal will be substantially reduced from RCom’s balance sheet. An RCom spokesperson declined to comment.

If the deal goes through in this form, it will be one of the largest overseas acquisitions by any Indian company. Tata Steel so far tops the list with its $12.9 billion purchase of the Anglo-Dutch steel maker Corus.

Interestingly, RCom had entered into the discussions with MTN after the foreign telco refused to sell a majority stake to Bharti Airtel. A source close the development said MTN always wanted to combine the strength of the two companies. “The new structure proposes that RCom, instead of ADAG, will be the controlling shareholder of MTN. Both RCom and MTN will enhance their partnership later. More importantly, this is the best option available under the changed circumstances,” he added.

‘Changed circumstances’ refers to RIL’s interpretation of a reverse merger of RCom with MTN as ‘sale’ of RCom leading to RIL possibly attempting to exercise its claimed RoFR in RCom. “It’s certain that Reliance Industries will take legal recourse if RCom reaches a reverse merger with MTN. The new structure, if it goes through, will mean RCom directly buying a controlling stake in MTN. This beyond the so-called RoFR claims,” they added.

Sources said both the parties are expected to extend the 45-day exclusive merger talks (during which the two sides would not talk to anyone else), which is slated to expire on July 8, by a couple of weeks. The due diligence is likely to be over by this week.

Newshelf 664 is the largest shareholder of MTN with a 13.1% stake. The Beirutbased Mikati family holds a 10.2% while PIC has a 9.7% stake. The rest 67.1% is widely held.

Meanwhile, Fitch Ratings upgraded MTN’s national long-term rating to ‘AA-(zaf)’ from ‘A+(zaf)’ with a stable outlook, reflecting MTN’s position as a leading emerging market mobile tele-communications player following considerable operational growth and its proven ability to operate successfully in challenging environments. Fitch said the rating is supported by strong cash flow generation, low leverage and strong liquidity position of MTN which has a subscriber base of over 116 million in 23 countries.