RCom, MTN close to share swap deal

Reliance Communications and South African telecom major MTN Group are close to finalising a reverse merger deal under which RCom will become a subsidiary of MTN Group and its chairman Anil Ambani will initially hold 28 to 30 per cent in the merged entity, whicg would make him the largest shareholder.

The deal would create a telecom colossus with 115 million subscribers in 25 countries.

Ambani, who holds 66 per cent in RCom, may then buy another 4 to 6 per cent either through market operations or from shareholders to reach a 34 per cent shareholding in MTN through an all-cash deal. The promoters will have to pay $1.8 billion to $2.5 billion to buy the residual stake.

MTN's promoters will hold the remaining 65 per cent stake in the merged entity.

The Ambanis do not want to exceed a 34 per cent holding in MTN because South African rules mandate that crossing the 35 per cent limit invites a "tender offer" (open offer) for 20 per cent of shares.

The deal also requires MTN to make an open offer to RCom shareholders to make it a subsidiary. Under Indian laws any company acquiring more than 15 per cent has to make an open offer.

MTN also has to ensure that its equity stake in RCom does not exceed 74 per cent, the maximum permissible foreign direct investment (FDI) in telecom companies under Indian laws. RCom's foreign holding is currently limited to foreign institutional investors that hold 11 to 12 per cent.

Sources said the promoters might also swap up to 50 to 55 per cent of their equity in RCom to meet FDI norms and continue to hold the rest directly in the firm. In that case the Ambanis would get a much lower stake in MTN and have to fork out more cash to reach the desired 34 per cent level in MTN.

The specifics of the shareholding structure will depend on the share-swap ratio, which is yet to be decided.

"Discussions

are at an advanced stage and the valuation of the company will be fixed only after the due diligence is complete. A top team of RCom is studying MTN's books and the process is expected to be completed by next week," sources familiar with the developments said.

Ambani is likely to be nominated the chairman of the company and current MTN CEO Phuthuma Nhelko will continue as the executive head of the merged entity.

When contacted, an RCom spokesperson declined to comment on the development.

The structure of the deal was finalised after Ambani met Azmi Mikati, chief executive of M1, the investment arm that is MTN's second largest shareholder with 10.2 per cent, in London last Wednesday. He also met top MTN executives including Phutumo Nhelko.

Newshelf 664, owned by MTN employees and management, is the largest shareholder with nearly 3 per cent more than the Mikatis.

MTN Group, with over 68 million subscribers in 22 countries in Africa and Asia, has a market capitalisation of around $38 billion. Analysts were expecting a premium of over 20 per cent to this, which values the company at over $45 billion.

How the deal works

Promoters led by Anil Ambani who have 66 per cent in RCom will swap it for 20 to 30 per cent in MTN and become the largest shareholder. RCom will become a subsidiary in which MTN will have 66 per cent.

MTN has to make an open offer to RCom shareholders under stock exchange rules but cannot exceed 74 per cent under foreign direct investment rules.

The Ambanis might only swap between 50 and 55 per cent in RCom for MTN shares to meet FDI rules since foreign institutional investors currently hold 11 to 12 per cent in RCom

In that case the Ambanis will get a much lower stake in MTN in a share swap and might have to pay more cash to reach the desired 34 per cent ownership by buying shares in MTN from the open market