RCom-MTN can be in global top 10

MUMBAI: Reliance Communications Ltd and South Africa's MTN have begun due diligence as they inch closer to creating a global top-10 telecom firm, a source close to the development said.

The two firms began due diligence over the weekend aimed at a reverse takeover, the source said on Wednesday.

Media reports last week suggested the two were discussing a cash and stock swap deal where MTN would take a stake of up to 74 per cent in India's No. 2 mobile operator, and Reliance chairman Anil Ambani become the biggest shareholder in MTN.

The Financial Times on Wednesday said Ambani may link up with private equity groups for the deal, but the source said Reliance may not need assistance in funding as the discussions were aimed at a reverse takeover.

Still, industry sources said if MTN were to insist on a large sum of cash as part of any deal, the private equity option could 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 discussions.

Ambani could be open to selling a part of his 66 per cent 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 Rs 1400 crore ($330 million) from a private placement of 5 per cent 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.

Liquidity is tight now, and markets are volatile, so private equity may be an easier option for Ambani now," the manager said.

But the credit squeeze is also hurting private equity firms, and they may be averse to doing large deals now -- or push for lower valuations, said a manager at another private equity firm.

The Economic Times last week said a potential deal could see Ambani emerge as the largest single shareholder in MTN, with the Indian firm becoming a subsidiary of sub-Saharan Africa's biggest mobile phone operator.