MUMBAI: South Africa's MTN Group and Reliance Communications may swap shares or take big stakes in a new company as regulatory hurdles and both firms' global ambitions seem to rule out a $66 billion emerging markets telecoms merger.
The companies said on Monday they were discussing a possible combination, just days after India's top mobile firm Bharti Airtel ended talks with MTN after failing to agree how to structure a deal.
Bharti has said MTN proposed a structure that would have made it an MTN subsidiary, an outcome that was unacceptable to the Indian firm, which has ambitions of becoming a global player.
Analysts said Reliance Communications' chairman, Anil Ambani, who owns two-thirds of India's No.2 mobile operator, would also not want to cede control, casting doubt on media reports that MTN, valued at around $38 billion, planned a reverse takeover of Reliance, which has a market value of about $28 billion.
"If the structure proposed by MTN was not agreeable to Bharti, it's very hard to see them getting Anil Ambani agreeing to it," said one telecom analyst, who asked not to be identified.
MTN has more than 68 million subscribers, while Reliance Communications has around 48 million.
Rishi Sahay, director of Indusview Advisors, said the two firms might transfer shares to a separate entity in which they would both hold significant stakes, or swap shares in a way to get around potential regulatory hurdles.
MTN could take a stake of below 15 percent in Reliance Communications, avoiding having to make an open offer for a further 20 percent, and Reliance could take a minority stake in MTN that avoids regulatory triggers.
"It will most likely be a simple share swap that doesn't run into regulatory hurdles or require big cash," Sahay said. "No sudden-death M&A type of deal." The Economic Times, citing unidentified sources, said Ambani may swap his 66 percent stake in Reliance Communications for a one-third holding in MTN. Ambani would retain an indirect holding of nearly a fifth in Reliance Communications.
The Financial Times, citing people familiar with the matter, said such a deal would leave Ambani as the biggest single shareholder in an enlarged MTN.
A banking source said Reliance held informal talks with MTN last year, leading to it conducting due diligence on MTN, sub-Saharan Africa's leading mobile operator.
"The best outcome would be the formation of an offshore holding entity in a tax-neutral zone with (both) as units," said the banker, who advised Reliance last year and asked not to be named because of the sensitivity of the current talks. The banker said last year's talks broke down after the two sides could not agree on a valuation.
"If talks don't progress as expected, the two could trade minority stakes in each other. Such a move sets the contours for further discussion and kisses a long-drawn bidding war goodbye," the banker said.
NO BIDDING WAR
Indusview's Sahay said Reliance Communications, which has a track record of buying up smaller, often distressed assets, would not want to risk a bidding war over MTN.
"It's in their DNA. They might do due diligence and negotiate but if they feel it's too expensive, they will just walk away," Sahay said, noting Reliance lost out to Vodafone last year in an $11 billion race for control of smaller local rival Hutchison Essar.
"Their strategy has been to go after distressed assets because they can buy them cheap, then sell stakes at a premium," said Nishna Biyani, telecoms analyst at Prabhudas Lilladher.
Biyani said Reliance would want to avoid any deal structure that would issue fresh equity or load on debt, noting the firm had aggressive capex plans -- including more than $1 billion to roll out GSM services across India -- and an IPO lined up for its Reliance Infratel tower unit.
"RComm is the smaller player in this case, so it can't ask for a majority shareholding in MTN," Sahay said. "But neither will it be willing to be just a subsidiary." Reliance Communications shares rose 1.5 percent on Tuesday, while MTN was quoted off 4.5 percent at a 4-week low.
