/ 9 July 2008

MTN, Reliance extend exclusive talks

South African mobile phone operator MTN Group and India’s Reliance Communications have extended exclusive talks on a potential combination to create a top-10 global telecom group.

The two-week extension, announced on Wednesday, comes after a claim by Mukesh Ambani, estranged brother of Reliance Communications chairperson Anil Ambani, on shares in the Indian company and a sharp drop in share prices created hurdles to a deal by the original deadline of July 8. The new deadline is July 21.

MTN and Reliance said on Wednesday there was no certainty the discussions will result in a deal.

Dobek Pater, telecoms analyst at Africa Analysis, said the market had expected the talks to be extended.

”I think they will like to pursue the deal because they do think that is a viable opportunity. And given more time the brothers will be able to resolve misunderstanding within Reliance,” Pater said.

Shares in Reliance Communications, which had lost 27% since the company first said it was in talks, rose as much as 7% on Wednesday after the July 8 deadline for talks had passed without a statement from either company, interpreted as a signal the deal was off and removing the risk of legal action by Mukesh Ambani.

They subsequently gave up some gains after the announcement and were up 4,5% at 434 rupees at 6.56am GMT in a firm Mumbai market, supported by a view that as the talks were being extended, both sides had confidence the legal issue could be resolved.

”The extension of talks is a sign that both sides are serious about a deal,” said Nishna Biyani, telecom analyst at brokerage Prabhudas Lilladher in Mumbai.

”That’s good news for shareholders.”

MTN and Reliance Communications started talks on May 26 as part of an effort that could create an emerging markets telecoms group with operations in about two dozen countries and around 120-million subscribers.

The talks began after Reliance Communications’ larger rival Bharti Airtel failed to reach a deal with MTN. At the time, MTN had a market capitalisation of $38-billion and Reliance Communications was worth $28-billion, but a sharp slide in markets has since eroded valuations.

On Tuesday, MTN had a market capitalisation of $31-billion and Reliance Communications’ had fallen to $20-billion.

Media reports and a source earlier indicated the two firms were aiming for a reverse takeover, with a share swap that would give the Anil Dhirubhai Ambani Group the largest shareholding in MTN and make Reliance Communications a subsidiary of MTN.

That triggered a claim of right of first refusal from Mukesh Ambani, who runs Reliance Industries, India’s most valuable listed company.

Mukesh and Anil were ranked the world’s fifth and sixth richest men respectively by Forbes magazine earlier this year.

”Clearly, this extra time is for Reliance Communications to settle the dispute with Reliance Industries,” said Kevin Trindade, a telecom analyst at brokerage KR Choksey in Mumbai who has a buy rating on Reliance Communications.

Reliance Communications, which has snapped up a series of smaller overseas assets, has nearly 50-million subscribers in India, the world’s fastest-growing mobile market and the largest after China.

MTN has about 68-million subscribers and has pursued an aggressive acquisition spree in risky but lucrative African and Middle Eastern markets. It is eyeing other emerging markets.

Jayesh Shroff, fund manager at SBI Asset Management, said it was difficult to predict what would happen in the talks. ”Everything depends what structure they are looking at and at what valuation, which is not yet clear.” – Reuters