Merger talks fail between Reliance and MTN

India's Reliance Communications and South Africa's MTN call off their merger talks, just weeks after Bharti abandons its own plans to pursue MTN.
Indian telecommunications firm Reliance Communications and Johannesburg-listed mobile operator MTN have aborted their merger discussions, citing legal and regulatory issues.

MTN informed the Johannesburg exchange on Friday and Reliance Communications told its shareholders on Saturday that an exclusivity agreement between them would lapse. The two parties had entered the 45-day exclusivity on May 26 and, as recently as July 9, had extended the agreement until July 21.

MTN, which has 68 million subscribers, is Africa's largest cellular operator. It is being advised by Merrill Lynch and Deutsche Bank.

Reliance Communications is the flagship company of the ADA group. It was part of Anil AmbaniÆs share of the Reliance empire after a split of assets in 2005 following the death of patriarch and founder Dhirubhai Ambani in 2002. AnilÆs older brother Mukesh founded the telecommunications firm which commenced operations in 2003. In the division of the spoils presided over by their mother, Kokilaben, Mukesh inherited the old economy businesses: polymers, chemicals, petroleum and textiles among others, while Anil got the new economy businesses including telecommunications, power and finance companies.

Reliance Communications is being advised by Lazard.

The deal first seemed to be in jeopardy in June when MukeshÆs Reliance Industries suggested it had a first right of refusal on shares of Reliance Communications thus any merger discussions with MTN were illegal. Anil Ambani issued an official statement on June 13 saying that the claim was ôborn out of mounting despair and frustration at Reliance ADA GroupÆs continuing successesö and that the group ôdismissed Reliance IndustriesÆ claim with the contempt it deservesö.

At the time some India-based bankers had suggested the deal was unlikely to go through as Mukesh would not have fired such a salvo without adequate back-up. And one month later, this prediction has come true. Media is speculating that MTN might have been reluctant to proceed with discussions which could come with baggage of litigation and lawsuits.

The 2005 split of the Reliance group was preceded by a protracted period of mud-slinging between the brothers and had an adverse impact on the market capitalisation of most Reliance group companies. Market observers are hoping that this battle does not escalate into something as big.

This is the second Indian company which has not been able to conclude a deal with MTN. On May 5 Indian telecommunications firm Bharti Airtel, majority owned by Sunil Mittal, confirmed to shareholders that it was in exploratory discussions with MTN at the invitation of the South African firm. The two parties reached an in-principle agreement and initialled a term sheet on May 16. However, when the board of MTN was asked to ratify the term sheet, the terms were apparently changed.

Bharti said in its stock exchange filing: ôMTN has now presented a completely different structure, from what was agreed. This new structure envisages Bharti Airtel becoming a subsidiary of MTN and exchange of majority shares of Bharti Airtel held by the Bharti family and Singtel, in exchange for a controlling stake in MTN.ö

Bharti termed the proposed structure ôconvolutedö and further said that it compromised the minority shareholders of Bharti and was not in consonance with BhartiÆs vision to transform itself from an Indian teleco into an Indian multinational firm. Bharti had secured $60 billion of financing for the MTN merger from a consortium of banks led by its adviser Standard Chartered.

Some journalists are speculating that Bharti could step back into the fray now that Reliance Communications has bowed out.

A deal involving MTN will be IndiaÆs largest outbound acquisition to date, eclipsing the $14 billion takeover by Tata Steel of Corus UK in 2007. The Reliance Communications MTN combine is estimated by analysts to have been worth up to $70 billion.
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