Mumbai: After Mukesh Ambani-led Reliance Industries put a spoke in Reliance Communications' (RCOM's) plans to merge with South African telecom giant MTN, claiming right of first refusal (RoFR) in any stake sale plan by an Anil Ambani company, the latter is said to be looking at other means to merge with the South African company.

RCOM is said to be looking at setting up a special purpose vehicle (SPV) controlled by Anil Dhirubhai Ambani Group (ADAG) chairman Anil Ambani and in which a Middle East based sovereign wealth fund would also hold substantial stake. This SPV would then buy a controlling equity stake in MTN to become its single largest shareholder.

This would mean RCOM having to comply with the South African stock exchange rules which say that an acquiring company has to launch a tender offer if it's holding crosses 35 per cent stake in a local company. Two options exist for RCOM. One would be to acquire less than the 35 per cent stake limit and then ask MTN's shareholders to vote to waive their right to a tender offer.

Should MTN's shareholders agree, RCOM will be able to hike its stake to 40 per cent in MTN, and if not RCOM would have to remain content with a stake of just below 35 per cent also remain the single largest shareholder.

A trust by the name of Newshelf 664 is currently the largest shareholder with its 13 per cent stake. The Beirut-based Mikati family holds a 10.2 per cent stake while PIC has a 9.7 per cent stake. The rest 67.1 per cent is widely held.

Sources said RCOM can do this because of a loosely worded clause in the non-compete clause between ADAG and Reliance Industries according to which, ''If at any time, either group …. desires to sell or transfer all or substantially all of its holding together with control of any of the companies or a business or a material part of the undertaking of a business as a going concern in that group, it shall first offer … the opportunity to purchase the company holding, business or undertaking to the other group.''

This suggests that any stake sale must come together with transfer of control before the right of first refusal gets activated. ADAG has the right to argue that the right of first refusal can be enforced only if Anil Ambani goes along with a stake sale along with transfer of control. The Anil Ambani camp has already obtained legal opinion to support its claim that a right of first refusal isn't enforceable under section 111 A of the Companies Act, which permits unfettered sale or transfer of shares.

According to industry experts MTN is expected to be valued at $35-40 billion against its current market capitalisation value of about $30 billion for the transaction. RCOM will then have to contribute $12-14 billion to acquire a 35 per cent stake and may have to cough up more if the MTN shareholders allow it to acquire another 5 per cent stake.

Reports say Anil Ambani plans to sell about 50 per cent of his 66.12 per cent stake in R-Com in exchange for a 35 per cent holding in MTN.

Holding a 35 per cent stake in MTN would mean RCOM would not benefit from a consolidation of revenues and profits in its books though its merger with MTN though other benefits may accrue through synergies.

R-Com and MTN have until July 9 to decide whether they should go through with the deal.
If the deal goes through in this form, it will be one of the largest overseas acquisitions by any Indian company. Till now Tata Steel's $12.9 billion purchase of the Anglo-Dutch steel maker Corus is the biggest.
 
According to the earlier planned 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. This would have resulted in ADAG emerging as the single largest shareholder of MTN with RCOM becoming a subsidiary of MTN. According to the new structure RCOM, instead of ADAG, will be the controlling shareholder of MTN.
 
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 telecommunications company following considerable operational growth and a proven ability to operate successfully in challenging environments.