The complex structure being cooked up between those advising Reliance Communications and MTN demonstrates two things: the ambition of the leading emerging market groups in seeking out deals to take a commanding position on the global stage - and the intense difficulties in sealing them.
The combination of Reliance with MTN would create an emerging telecoms group covering more than 20 countries with a population of more than 1.6bn, and more than 102m mobile subscribers spanning India, the Middle East and Africa.
For Reliance, say those with detailed knowledge of the deal, this is a chance to leap from leading Indian operator to emerging market behemoth. With a combined ebitda of about $6bn and an enterprise value of about $70bn, the deal would catapult the combined Reliance MTN ahead of emerging market rivals such as Bharti and Orascom. The combined group would make about 30 per cent of its revenues in each of south-east Africa, west and central Africa and India, with about 10 per cent coming from the Middle East and North Africa.
But while the rationale of creating a high-growth emerging markets telecoms powerhouse may be compelling, the structural gymnastics under consideration by the advisory teams indicate that one consideration is coming to dominate the back-and-forth between the two sides: the preservation of Anil Ambani’s interests in the combined entity.
In order to justify an “attractive control premium”, Mr Ambani requires either a straight-forward takeover by MTN of Reliance - or a structure that ensures he maintains control after a deal completes, despite handing over the management reins to MTN’s chief executive.
It goes like this. MTN gets 51 per cent of Reliance from Mr Ambani, who now owns 66 per cent, paying in stock at an exchange ratio which confers an elevated valuation to the South African operator’s paper. The low foreign ownership in Reliance presently helps to avoid snags with India’s rules permitting a maximum of 74 per cent foreign interest.
MTN will launch a tender offer for up 20 per cent of Reliance stock from public shareholders, in cash, paying a price set at the higher of the 26-week average or the deal price under Indian takeover rules.
Given the structure of the deal, it seems likely to be the former. Minority shareholders would presumably opt to hang on for the ride in this piece of empire-building, preferring to take part in the enlarged company’s growth. That is forecast to be explosive, with those close to the deal citing revenue and ebitda CAGRs of in excess of 20 per cent.
Mr Ambani will seek to boost his holding of the enlarged MTN by buying shares from key investors in cash, to up his stake to 34.9 per cent. But only effective overall control will do for Mr Ambani - with no risk of challenge from troublesome third parties. A stake of just over a third won’t give him that, so unspecified arrangements will be required with “key” MTN investors through which his influence will be sealed.
The delicate balance here is between Mr Ambani’s need for control - and the political “optics” (or PR) of the deal from the South African side.
The deal would lock in a premium price for MTN shareholders. But key MTN shareholders would need to agree to sign over effective control of the Reliance MTN group to Mr Ambani - notwithstanding the retention of the South African group’s CEO.
How these heroic-sounding agreements will be couched - in order not to amount to “acting in concert” - is unclear. But for all the talk about South African sensibilities, this amounts to a de facto takeover of MTN by Reliance and its entrepreneurial figurehead.
Related links:
Ambani’s MTN control trick - FT Alphaville
MTN plans reverse takeover of Reliance - FT
Reliance woos elusive MTN - FT analysis
