Is this the real deal?

Who are Reliance Communications (RCom) and what are the likely outcomes of the discussions? RCom, previously known as Reliance Infocomm, is part of the Reliance-Anil Dhirubhai Ambani Group, one of India`s top three private sector businesses and the largest private sector information and communications company. RCom offers a reliable, high-capacity, integrated (wireless and wireline) and convergent (voice, data and video) digital network. It is listed on both the Indian National Stock Exchange and the Bombay (Mumbai) Stock Exchange. The main shareholder of RCom is Anil Ambani (66 percent), the chairman of RCom and the son of the, now deceased, founder of the parent group and one of the world`s richest men. RCom is much smaller than MTN (see table), but its perceived better profitability is mainly the result of the different tax structures between India and South Africa.

Although only established in 1999, RCom has not been tardy in its expansion. In the last 12 months, it has acquired Yipes Holdings, a US-based Ethernet service provider for $300 million. In April this year, it purchased UK-based eWave World, a WiMax operator. And earlier last month, it bought UK-based Vanco, a global network services provider for $77 million. It has also entered into a joint venture with Alcatel-Lucent for an outsourcing contract to provide managed services for CDMA and GSM networks in northern and western India.

In February this year, RCom consolidated its global telecoms business and operations under the Reliance Globalcom brand, a move which includes the business of Flag Telecom, the world`s largest undersea cable system.

A tie-up between MTN and RCom would create a mammoth player in the developing world, which would have a subscriber base of about 116 million, approximately 30 percent of the numbers of China Mobile, almost half of Vodafone (252 million), but nearly equal to the mobile subscriber figures of Deutsche Telekom (120 million).

I am convinced there will be an outcome to the discussions currently taking place. I would suggest that MTN will be taking a stake in RCom and possibly RCom in MTN, i.e. a share swap of some sort. The MTN stake in RCom cannot be more than 74 percent because of the Indian government`s ruling on foreign investments. If kept below 15 percent, it avoids having to make an open offer of a further 20 percent. A share swap with Ambani himself is also a possibility, giving him a 34.9-percent stake in MTN. Under South African rules, a shareholder who has a 35 percent stake is obliged to make an offer for the remainder, although the rules can be set aside if fellow investors give their consent.