Still in the hunt

The Reliance Anil Dhirubhai Ambani Group (R-ADAG) is treading the minefield of negotiations surrounding the deal between Reliance Communications (R-Comm) and South Africa-based MTN quite carefully. And despite the googly thrown by Reliance Industries Limited, everything seems to be on track for a merger between the two companies.

The story so far: on May 26, hours after Sunil Mittal’s Bharti Enterprises pulled out of negotiations with MTN, RADAG announced that it had secured 45-day exclusive negotiation rights with MTN regarding a tie-up between the two companies. It is believed that MTN favoured Anil Ambani’s move since he is willing to swap his shares in R-Comm for a controlling stake in MTN, while keeping the merged entity based in South Africa. The deal will therefore see R-Comm become a subsidiary of MTN.

With the period for exclusive talks ending on July 8, there has been an added sense of urgency. However, an R-ADAG spokesperson told BT that it was unlikely that a deal would be completed for a few days yet. Ambani has been in several closed-door meetings with MTN Chief Executive Phuthuma Nhelko in London, hammering out the modalities.

According to some, the sticky point as of now is the size of the stake R-ADAG will have in MTN after the swap of Anil Ambani’s estimated 66 per cent holding in RComm. Sources say that Anil Ambani will end up with approximately 34.9 per cent of MTN (avoiding the open offer that comes into play upon a 35 per cent acquisition under South African law), valuing MTN at 175 rand per share, or an estimated $45 billion.

However, while the reverse merger will keep MTN happy, since it insisted that it wants to remain a South African company, it could pose major headaches to Anil Ambani. If MTN were to acquire a 66 per cent stake in RComm, it will lead to a breaching of the 74 per cent foreign investment cap in telecom (as R-Comm is already 30 per cent foreign-owned).

Therefore, it is likely that Anil Ambani will use cash to fund part of the deal. With MTN’s valuation being so high, this could be an extremely expensive proposition.

There are other issues too, particularly regarding the management of the company. It is likely that Nhelko will stay on as Chief Executive, and Ambani will be Co-chairman of the group alongside existing Chairman Cyril Ramaphosa. It is also unlikely that any large-scale changes will take place in the management structures of any of MTN’s or R-Comm’s operations currently.

Given South Africa’s “Black Empowerment” policies, which mandate black participation in companies, it will be interesting to see how many managers from R-Comm are given powerful positions in MTN in case of a reverse merger between the two companies.

With Ramaphosa being a member of the board that looks after the South African Black Economic Empowerment (BEE), it is unlikely that these rules will be relaxed for MTN after Ambani acquires a stake.

But what comes as a sliver of good news for Anil Ambani is the green signal from the secondlargest shareholder in MTN—Azmi Mitaki of Lebanese conglomerate M1, which owns a 10.2 per cent stake in MTN, has agreed to the merger. A board member, Mitaki’s approval of the deal was seen as crucial since the family also indirectly has an even larger stake in MTN.

However, with just under two weeks remaining before the 45-day exclusivity period expires, negotiations have become more frantic. MTN has been approached before, and it has always played the runaway bride; however, Anil Ambani seems to be the man who can keep this blushing bride at the altar.