Shares in Reliance Communications, which is in talks with South Africa’s MTN, rose more than 6 percent on Thursday after a brokerage said the deal was positive and it expected a rebound in the stock.
The stock rose as much as 6.5 percent to 587.70, taking it to its highest since last Friday, the last day of trading before the talks about a possible tie-up with MTN were announced. The stock had lost 3.6 percent on Monday.
Macquarie Research analysts referred to media reports of a share swap between Anil Dhirubhai Ambani Group (ADAG), 66 percent owner of Reliance Communications, and MTN, that would see MTN become the largest shareholder in Reliance Communications and ADAG in turn becoming the biggest controlling shareholder in MTN.
"This deal structure would require no equity dilution and/or issuance of new debt at RCOM, which makes the deal doable," Macquarie Research analysts said in a report.
Macquarie has an outperform rating on Reliance Communications stock with a 12-month price target of 865 rupees, 57 percent higher than its Wednesday closing price of 551.6 rupees.
"We see the deal as positive for RCOM due to the ramp-up in non-wireless businesses and we expect the sale of shares to MTN to be at a premium to RCOM’s current price," the report said.
A deal with MTN would help Reliance Communications’ international unit, Reliance Globalcom, to tap emerging markets in Africa and the Middle East for its non-wireless businesses.
If MTN acquired a stake of 15 percent or more in Reliance Communications, Indian law would require it to make an open offer for a further 20 percent.
"We believe the open offer is likely at a premium to RCOM’s current stock price," the analysts said.
Reliance Communications stepped into a gap left by India’s top mobile firm, Bharti Airtel, which said at the weekend it had ended talks with MTN after failing to agree how to structure a deal.
The Macquarie analysts said a merger of Bharti and MTN would have required significant equity dilution and debt issuance by the Indian mobile firm.
Separately, JPMorgan analysts said that given India’s 74 percent limit on foreign ownership in telecom companies, MTN would be able to acquire about 61 percent of Reliance Communications, and in turn ADAG would be able to own 33 percent stake in MTN Group.
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