India's Reliance Communications and South Africa's MTN have begun due diligence as they inch closer to creating a global top-10 telecommunications firm, a source close to the development said yesterday.
Reliance Communications, India's number two mobile operator, has also engaged Deutsche Bank for the possibility of roping in private equity firms for part of the deal, the source said.
Blackstone Group, Carlyle Group and Apax were "interested and ready" to put in $4 billion to $5 billion, the source said.
"[Reliance chairman Anil] Ambani doesn't need assistance in funding. But through the PEs he can take the whole 34.9% stake," the source said.
Under South African regulations, a company can buy up to 35% without having to do an open offer for a further stake.
Media reports last week suggested the two firms were discussing a cash-and-stock swap deal where MTN would take a stake of up to 74% in Reliance Communications, and Ambani would become the biggest shareholder in MTN.
The Economic Times paper said, based on foreigners holding 11% of Reliance Communication shares, Ambani could swap between 43% and 63% of his holding for a stake of 28% to 34% in MTN, to become its largest single shareholder.
India allows up to a 74% foreign holding in telecoms firms by foreign companies. A purchase of 15% of a firm triggers a mandatory open offer for another 20%.
A transfer of 49% in Reliance Communications would give Ambani a maximum of 28% in MTN, the source said.
Plausible option
The Financial Times said yesterday that Ambani may link up with private equity groups for the deal.
Industry sources said if MTN were to insist on a large sum of cash as part of a deal, the private equity option may be tapped.
"It certainly is an interesting and plausible option if MTN were to ask for a large cash component," said a manager at a private equity firm that is not involved in the discussions.
Ambani could sell a part of his 66% stake in Reliance Communications to private equity firms, he said.
"They have already done a deal with private equity firms before, and these firms may well have told Ambani that they are willing to be a part of this deal," he said.
Reliance Communications last year raised 14 billion rupees from a private placement of 5% of its tower unit company, Reliance Infratel, with seven investors: Fortress Capital, HSBC Principal Investments, Galleon Group, New Silk Route, GLG Partners, Quantum Fund and DA Capital.
But a credit squeeze is hurting private equity firms, and they may be averse to doing large deals, or push for lower valuations, said a manager at another private equity firm.
Ambani's large holding in his flagship company and low foreign ownership makes a deal with MTN more plausible than the one that Bharti Airtel walked away from, Citigroup analysts said in a note this week.
Morgan Stanley has estimated an open offer for Reliance Communications shareholders could be at 613 rupees a share, a 7% premium to the stock's closing price on 23 May, the last day they traded before the firms said they were in talks.
Shares in Reliance Communications fell 2.3% yesterday to 540.15 rupees in a broader market down 2.8%. They have lost 5.6% in the eight sessions since the talks were announced.
Reliance is being advised by Lazard, while Merrill Lynch is advising MTN.
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