Falling shares, Ambani feud could scuttle MTN deal

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Mumbai, July 3: : India's Reliance Communications Ltd has days to reach an agreement for a tie-up with South Africa's MTN Group, but falling shares and a face-off between the Ambani brothers could all but scuttle a deal.

Shares in Reliance Communications, which is holding exclusive talks with South Africa's MTN to create a global top 10 telecoms company, have shed a third of their value since the company, run by Anil Ambani, said in May the firms were considering a potential combination. Reliance shares fell 6.9 per cent on Thursday.

There is no sign that the bitter rivalry between India's two richest men is letting up. Anil Ambani's aim to create a global company has been threatened by a claim from older brother Mukesh Ambani, who controls Reliance Industries, of first right of refusal on India's No. 2 mobile operator.

"The tiff has almost certainly scuppered the deal," said Emeka Obiodu, a senior mobile technologies specialist at London-based research firm Global Insight.

"As long as there is any uncertainty about the legal validity of a deal, it is unlikely MTN will go through with it. And there is no point in extending talks if the situation will not change."

The 45-day exclusivity period ends on July 8, Reliance said.

Reliance Communications said last month the claim by Reliance Industries would not delay its talks with MTN. But traders in Mumbai earlier this week said concerns that Mukesh may throw a spanner into the works had helped push down the share price.

The lower valuation of Reliance Communications, which now has a market worth of about $18 billion, down from nearly $27 billion when it first said it was in talks, could spoil the share swap that the two firms were reported to be discussing.

"Will MTN still be inclined to give Ambani a big stake, now that Reliance shares are down?" said Harit Shah, telecom analyst at Angel Broking, which has a 'buy' rating on the stock.

Media reports and a source close to the development had indicated the two firms were aiming at a reverse takeover, with a share swap that would give the Anil Dhirubhai Ambani Group the largest shareholding in MTN, and making Reliance Communications a subsidiary of MTN, sub-Saharan Africa's top mobile operator.

"Ambani may also need more cash, now that valuation has fallen, and that will be difficult in this market," Shah said, adding the deal had a "50-55 per cent chance" of going through.

The volume of worldwide mergers and acquisitions announced in the first half of 2008 fell by 36 per cent compared with the same period last year, Thomson Reuters data showed, because of volatile markets.

OTHER SUITORS

Newspapers reported on Thursday that Reliance Communications along with investors, including Middle East sovereign wealth funds, may buy a majority stake in MTN rather than merge operations as planned earlier.

A spokesman for Reliance Communications declined comment.

Reliance Communications may also consider a revenue-sharing agreement, said Kevin Trindade, analyst at KR Choksey Securities.

"They will have to restructure the deal. The legal challenge from Reliance Industries can open a whole can of worms and a lengthy legal battle can drag the shares lower," he said.

A potential combination of MTN and Reliance Communications will have operations in about two dozen countries.

Reliance Communications, which has snapped up a series of smaller overseas assets recently, will not be content simply with growth in the Indian market, which Gartner consultancy forecast would expand cellular services revenue at 18 per cent annually and add subscribers at 21 per cent a year till 2012.

It is keen on Africa: it recently bought a telecoms firm in Uganda, and was one of four bidders last year for a controlling stake in Telkom Kenya, which went to France Telecom.

This time around though, it cannot hope to fend off other suitors for MTN, Obiodu said.

"MTN has signalled it's on the market and other bidders may only be waiting for the exclusivity period to end before they throw their hat into the ring," he said.

"Vodafone, France Telecom, Deutsche Telekom and China Mobile are all interested in the Middle East and African markets," he said.

An investment banker who is not directly involved in the deal also said MTN "would not play the waiting game" with Reliance.

"Anil is a tenacious guy and will fight, but he has nothing to offer as bait to keep MTN interested for long," he said.

The deadline to the talks comes two days after the death anniversary of Dhirubhai Ambani, founder of Reliance Industries, and still a strong influence on the squabbling Ambani brothers.

Anil, who chose his father's birth anniversary in December 2006 to announce his interest in Hutchison's controlling stake in the Indian mobile venture with Essar, may well pick the 6th.