South Africa’s MTN Group has started talks with Indian mobile operator Reliance Communications that could create a $66 billion emerging markets telecoms group.Indian number two Reliance quickly stepped into the void after bigger rival Bharti Airtel pulled out of talks with MTN at the weekend aimed at taking control of sub-Saharan Africa’s biggest mobile operator.
A combination of MTN, valued at $38 billion at Friday’s close, and Reliance, valued at $28 billion, would create a top ten global industry player to rival Japan’s NTT DoCoMo Inc in market value. In terms of subscribers, a merged group would slot in just below Deutsche Telekom -- as the seventh biggest in the world..
A source with knowledge of the negotiations said Reliance would not be looking for the same structure as Bharti in the deal. Media and analysts had speculated that Bharti was eyeing a 51 percent stake in MTN and Bharti said it had pulled out of talks after the South African firm suggested it become an MTN subsidiary.
Shares in Reliance fell as investors worried about the costs of a deal while MTN stock fell as much as 7.6 percent. Investors were expecting a healthy premium from a Bharti buyout.MTN is seeking new markets outside Africa and the Middle East and will likely push to retain its brand and culture.
"Whatever the shape of the company moving forward, there is little doubt that the retention of the MTN brand and culture would be two of the most important aspects executive management and shareholders should ensure," Frost & Sullivan analyst Lindsey Mc Donald said.
Reliance Communications and MTN said earlier that the two groups had entered into exclusive talks about potentially combining their businesses. A 45-day exclusivity period will be in force, during which neither can talk to any other entity.
Reliance Communications Chairman Anil Ambani, one of India’s richest men, said a deal with MTN could "provide investors, customers and the people of both companies a global platform for exponential growth".
LACKS FINANCIAL MUSCLE
MTN had 68.2 million subscribers as of March, compared with Reliance Communications’ 48 million.
"Reliance Communications is smaller than MTN, and lacks the financial muscle for a takeover, but it is not going to want to be a subsidiary, either," said Ravi Dodhia, a telecoms analyst at KR Choksey Securities.He said the two firms were instead likely to create a new company, with MTN taking a 51 percent stake.
But Rajay Ambekar, a telecoms analyst and fund manager at Cadiz African Harvest in Cape Town said MTN Chief Executive Phuthuma Nhleko and his executives were aggressively looking for growth and sector consolidation opportunities."If MTN is looking to remain listed on the Johannesburg Stock Exchange and remain a South African company and be the aggressor in this deals, having this sort of exclusivity says to everyone else: ’You guys don’t approach us, don’t bother, we are not looking to be acquired’," Ambekar said.
Harit Shah at India’s Angel Broking, said Reliance and MTN might swap shares, as the foreign holding in Reliance Communications was considerably lower than in Bharti Airtel, a factor that was seen as a possible roadblock for Bharti’s attempted deal.
Foreign ownership of Indian telecom firms is capped at 74 percent, and Bharti is 30.5 percent owned by Singapore Telecommunications.
Shares in Reliance Communications, fell as much as 5.7 percent to their lowest since May 12 while in Johannesburg, shares in MTN fell as much as 7.6 percent to 145.11 rand, their lowest since April 30.
"The market is disappointed that MTN has called off its talks with Bharti Airtel," said Garth Mackenzie, a trader at BOE Stockbrokers in Johannesburg.
"The market was anticipating a buyout from Bharti of MTN of a controlling stake. Naturally, Bharti would have to pay a premium to the share price, if shareholders were going to give up their shares," he said.
Analysts had speculated that Bharti Airtel was engineering a merger that would value MTN at up to $50 billion.
Shares in Bharti rose as much as 4.2 percent to 872 rupees, their highest since May 6, when they slumped more than 5 percent on news that Bharti was in talks with MTN.
Reliance Communications bought Ugandan Anupam Global Soft Ltd in February, saying it would launch mobile services in Uganda by the end of 2008 and spend up to $500 million over five years to build a telecom network there.
Last year, it lost the $11 billion race for majority control of India’s third-largest mobile provider to Vodafone Plc, but has made several smaller overseas acquisitions, including a UK-based WiMax operator of 4G services.
India’s wireless market grew 25-fold between 2002-07, ringing up record profits for telecom firms, but that growth is expected to slow as the percentage of the population with a mobile phone tops 40 percent by 2010 from 22 percent now.
In contrast, MTN is present in some of the world’s most lucrative markets, such as Nigeria, Cameroon, Ghana, Zambia and Uganda, and has said it is keen to pursue more expansion opportunities in emerging markets.
Reliance is being advised by Lazard while MTN is advised by Merrill Lynch.
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