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In what would be one of the largest mergers that India Incorporated has ever witnessed, Reliance Communications (RCOM) is reportedly on the brink of sealing a deal with South African telecom operator MTN. Speculation on this has been rife ever since Anil Ambani, chairman, RCOM, met with Azmi Mikati, chief executive officer, MTN, in London, and concluded another successful round of talks.

Of course, the deal still requires various authorisations from regulatory authorities in multiple countries. Both Reliance and MTN are learnt to be seeking a control premium on the price of the transaction: Reliance, on the grounds that it will become MTN's subsidiary, and MTN, as it will relinquish control to Ambani, who will become the largest shareholder with almost one-third stake.

But all this is far from standing in the way of Ambani, who has a team conducting due diligence at the MTN headquarters. It has also been reported that Reliance may invite international private equity investors to join the bid.

With 68 million subscribers in 21 countries, MTN is potentially a great buy. A merger/acquisition would pave the way for an operator like Bharti or Reliance looking to branch out into low teledensity regions like Africa and the Middle East to secure future growth. MTN's subscriber base is expected to increase by 36 per cent in 2008 to about 83.4 million, driven by strong customer growth in countries like Nigeria.

With the RCOM-MTN deal making rapid progress, rival Bharti Airtel's prior interest in MTN has now firmly become a thing of the past.

Despite having the potential to generate significant synergies through a combined market capitalisation of $70 billion and a 1.7 billion-strong customer base, extending from South Africa to Himachal Pradesh, the Bharti-MTN merger/acquisition fell through at the end of May 2008. Bharti was not agreeable to the terms and price stipulated by MTN, and the talks eventually ended. RCOM, which was waiting for such an opportun-ity, quickly moved in.

What went wrong for Bharti was MTN's proposed structure post-merger. According to the terms of the deal put forward by MTN, Bharti Airtel would have to become an MTN subsidiary. Bharti and participating stakeholders like SingTel would have had to exchange their majority stake in Bharti Airtel for a controlling stake in MTN. MTN's proposal is said to be in line with its political priorities. According to industry sources, the South African telecom company did not want to be perceived as selling out to an Indian company.

Meanwhile, Bharti's withdrawal has given Reliance the opportunity to create a $63 billion telecom entity with 116 million subscribers. Reliance and MTN are working out the modalities of the transaction. Currently, the two companies are actively considering a stock swap deal. Accordingly, Reliance's minority shareholders can either swap their shares with MTN or encash their shareholding by participating in an open offer, to be launched by MTN. On its part, MTN would sign an agreement to purchase up to 74 per cent stake in Reliance.

The transaction would involve a twostep process: first, there would be an open offer for the shares owned by Reliance's minority shareholders, where up to 20 per cent shareholding in Reliance will be sold; second, Anil Ambani would swap his shares in Reliance for MTN shares, enabling MTN's shareholding in Reliance to reach 74 per cent. The Anil Dhirubhai Ambani Group owns close to 66 per cent of RCOM, while foreign investors own about 11 per cent.

The companies are also mulling over a future management structure. So far, they have agreed that while the apex management committee will comprise an equal number of members from both companies, MTN's African and Reliance's Indian operations will be run by the existing management.

Undoubtedly, MTN is a lucrative opportunity for Reliance. However, some analysts are concerned. The Indian wireless service provider has been on something of an acquisition spree of late, purchasing Vanco, e-waves and Anupam Globalsoft. Multiple acquisitions across multiple sectors like 4G, infrastructure and enterprise network services, in addition to its nationwide expansion into GSM services, may not be the most focused strategy, according to some. But, without doubt, it is its most ambitious one yet.

As we go to press, the RCOM-MTN deal seems to have hit a major roadblock. Reliance Industries Limited (RIL) has written to MTN non-executive chairman, Cyril Ramaphosa, and group president and CEO, P.F. Nhelko, claiming that it has the right of first refusal in case of a sale of RCOM as per a non-compete agreement signed by Reliance Communications Ventures Limited (now RCOM) and RIL in January 2006. It has further stated that it would adopt legal proceedings to enforce this.

RIL feels that it should have the first right to buy out RCOM as it was Mukesh Ambani who had built the telecom company in the first place. Moreover, according to RIL, it would in fact be protecting RCOM's shareholders from a deal that may not be in their best interest though it may be advantageous to Anil Ambani.

The Anil Dhirubhai Ambani Group (ADAG) has strongly refuted RIL's claim. Its contention is that all the companies that had signed the non-compete agreement were under Mukesh Ambani's control at the time. It believes that RIL does not really want to buy out RCOM and is only attempting to disrupt the negotiations with MTN. In a stronglyworded reply to RIL's letter, it has asserted that it will defend any legal action taken by RIL and claim cost and damages.

Despite the crossfire, MTN is continuing its negotiations with RCOM as per their 45day exclusive talks' agreement. An MTN team is currently in Mumbai to carry out due diligence on RCOM.