When the deal goes down

Mukesh Ambani's intervention in the Reliance Communication-MTN negotiations seems to have nudged the deal in a direction that might help brother Anil. The roundabout plan of Anil buying a stake in the South African telecom giant by offering majority control of Reliance Communications (RComm) to it has now all but been abandoned. As per plan A, Anil was to own a little less than 35 per cent of MTN. At the time of writing, sources said that there is a high chance of the exclusivity agreement between MTN and R-Comm being extended for a few more days. It was scheduled to end on July 8. Anil may just escape the prospect of putting $13-14 billion (Rs 55,900-60,200 crore) of his personal wealth (in the form of a 35 per cent stake in MTN) in the uncertain waters of the South African regulatory environment.

Uncertain waters: That’s what deals for Essar’s Ruia, Sun Pharma’s Shanghvi and Sterlite’s Agarwal are in

R-Comm-MTN is not the only deal that is in uncertain waters. At least two more deals, one between Sun Pharma and Taro of Israel and the other between Sterlite and Asarco, are also stuck. What’s more, recently, the Ruias of Essar announced they were withdrawing from the race to acquire Esmark after they were outbid by Russian rival SeverStal. Sun Pharma is facing a hostile Taro management and is trying to force its way in—with a tender offer and by initiating a buyout of the promoter’s stake. The management of Taro is likely to make an announcement on July 14 on the Sun offer. The acquisition process ran aground after the Taro management suddenly woke up to the possibility of surviving a financial crisis on its own after it had used Sun’s capital infusion to shore up its balance sheet. Sterlite is probably on firmer ground. Asarco’s trade unions are in favour of being taken over by Sterlite and have rejected a counter bid by estranged promoters

Grupo Mexico. Sterlite sources say now the road is clear for the company and it just needs to stay the course to complete the acquisition. In the case of Essar, things did not work out quite the same way as Sterlite because the Esmark trade unions supported rival SeverStal. Does such global opposition to wannabe cross-border acquirers mean that Indian money is no longer attractive to foreign managements? Or, are Indian promoters being eyed suspiciously now? Far from it, says Prahlad Shantigram, Managing Director (Corporate Advisory Business), Standard Chartered Bank. “The number of deals that Indian companies are chasing have gone up substantially.

So, as a percentage of that, I do not think these few deals not happening is an issue. My firm belief is that Indian companies are on the calling list of most sellers, and sell-side advisors are including Indian companies in their list,” says Shantigram. Standard Chartered had advised Bharti when it was negotiating with MTN earlier. What really seems to have happened is that even though valuations have dipped globally, expectations of sellers haven’t. Shachindra Nath, Group Chief Operating Officer, Religare Enterprises says the setbacks faced by Indian promoters are purely a function of capital. “The last three years were good for the Indian companies as they were getting excellent market capitalisation against their earnings. The global debt markets were also efficient. The market cap was leveraged by Indian companies to fund buyouts.

That situation has changed.” Nath explains that with their market caps falling, the ability of Indian companies to raise equity has been hit. That, in turn, has hit their ability to bring in debt; and whatever debt is coming now is expensive. “While the number of companies looking at acquisitions has increased, many are skeptical about their own ability to service expensive debt,” adds Nath. R-Comm is a good example of this. Its stock has been the worst-hit in the current market meltdown, having lost one-fourth of its value in June. That appears to have weakened its negotiating clout—as much as brother Mukesh’s intervention has.

Anil has complained to the Securities & Exchange Board of India about his group’s stocks being hammered (see Advantage Anil?). Moreover, MTN CEO Phuthuma Nhleko has a reputation for being a tough negotiator. R-Comm sources indicate that finances are being arranged and a deal will be announced; however, negotiations will carry on for some more time. It has always been a hard bargain for Indian companies—gaining control and yet keeping all the existing stakeholders (read managements) happy about it. The drop in market capitalisation on Indian bourses has, however, taken away some of the bargaining chips.