Reliance Comm, MTN doing due diligence-source

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By  Rina Chandran and Devidutta Tripathy Published  June 4, 2008

India's Reliance Communications Ltd and South Africa's MTN have begun due diligence as they inch closer to creating a global top-10 telecoms 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% 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 percent 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 ($330 million) 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.

"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 paper 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.

Based on foreigners holding 11% of Reliance Communication shares, Ambani could swap between 43 and 63% of his holding in the company for a stake of 28 to 34% in MTN, it had said.

India allows up to a 74% foreign holding in telecoms firms by foreign companies, with a purchase of 15% triggering a mandatory open offer for 20% more.

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.

Analysts and media estimate foreigners own 10 to 13% of Reliance Communications.

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 May 23, the last day they traded before the firms said they were in talks.

Shares in Reliance Communications fell 2.3% on Wednesday 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 are advising MTN.(Reuters)

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