Mumbai: Anil Dhirubhai Ambani Group (ADAG) company Reliance Communications Ltd is reported to be in talks with South Africa's MTN, discussing an appropriate share swap ratio, that could potentially culminate in the formation of a global top-10 telecommunications entity.
A team from Reliance communications is reported to be in Johannesburg for the due diligence process, and is slated to be back in Mumbai on 10 June.
The two mobile service providers are believed to have reached major agreements on the broad contours of the deal that includes retaining the present management across most of their operating areas.
MTN is offering similar terms to Reliance as it was willing to give Bharti, which withdrew from talks over deviations from the agreed term sheet before Relaince stepped in. These include a non executive chairmanship or co chairmanship for Ambani with MTN group president chief executive Phuthuma Nhelko continuing in the same capacity.
However, it is the ratio that is yet to be finalised.Over the past week Reliance Communications and MTN have agreed to a cash-and-stock swap deal where MTN would hold around 74 per cent in Reliance Communications, with Reliance Communications chairman Anil Ambani emerging the single largest shareholder in the south African firm, holding around 34 per cent in the combined entity.
Anil Ambani is believed to be pushing for a ratio of 66 shares of MTN in exchange for every 100 shares of Reliance Communications. On the other hand, MTN would like to see a ratio of 51 shares of MTN exchanged for 100 shares of Reliance Communicaitons.
Depending on the stock-swap ratio, MTN would get anywhere between 63 and 74 per cent of Reliance Communication's equity, with Anil Ambani transferring anywhere between 43 and 63 per cent stake in the company. Ambani, who holds 66 per cent of Reliance Communications, would get anywhere between 28 and 34 per cent of MTN in return.
If he gets the lower end of that range, he could choose to increase his stake by investing directly into MTN, and eventually hold around 35 per cent in MTN, which is the maximum that he would be able to hold under South African law without having to make an open offer.
Ambani is said to be in talks with private equity firms that include Carlyle, Blackstone and Apax Partners, under advise of his bankers Deutsche Bank to raise the cash compenent for the transaction.
Reports say that the deal's structure reached the current stage after a meeting in London between Ambani and former Lebanese prime minister Najib Mikati's brother Azmi Mikati who is the chief executive of M1, the family investment arm that is MTN's second biggest shareholder with a 10.2 per cent stake. Newshelf 664, which is owned by MTN management and employees is the largest shareholder, with a stake almost three per cent higher than M1.
They would need to pay between $1.8 to $2.5 billion to acquire the residual 65 per cent of the merged entity. Indian laws stipulate that acquiring more than 15 per cent of a telecommunications company mandates the acquirer to make an open offer, which would be the case with MTN planning to make Reliance Communications ts subsidiary.
Foreign direct investment (FDI) norms limit investment in telecommunications companies to 74 per cent, leaving ample room for MTN to acquire the stake as foreign institutional investors own around 11 to 12 per cent in the Indian company.