Exit Bharti, Enter Reliance in MTN Tango

A year ago, Anil Ambani, chairman of India's Reliance ADA Group, was vacationing in South Africa. While in the country, he was invited for dinner by Phutuma Freedom Nhleko, president of MTN Group, South Africa's leading telecom player. (The two had earlier met at an international forum, say Reliance insiders.)

That dinner didn't lead to any immediate relationship between the companies. However, it may have planted the seed for the surprise announcement on May 26 that Ambani's Reliance Communications had begun "exclusive negotiations" with MTN for a "potential combination of their businesses."

Making the news even more dramatic in India was the timing. Not only had the Reliance conglomerate—with $29 billion in assets, and interests in power, telecom, financial services, and entertainment—previously said it had no interest in MTN, but the South African company's talks with Indian company Bharti Airtel had only 48 hours earlier collapsed (BusinessWeek.com, 5/15/08).

Potential $63 Billion Juggernaut

What attracted Reliance, India's No. 2 telecom operator, to the MTN deal, just when it soured for rival Bharti? The chance to become a leading global telecom player. "Africa has been on the radar for both Bharti and Reliance, as it's the last of the underpenetrated telecom markets," says Madhusudan Gupta, senior research analyst in Singapore for Gartner (IT), a global IT research and advisory firm. A Reliance-MTN combination would create a $63 billion telecom juggernaut with 116 million subscribers across India, Africa, and the Middle East, larger than AT&T (T) and many European players.

That, of course, was what had attracted Bharti to MTN (BusinessWeek, 5/15/08). Only a week earlier, on May 16, Bharti—backed by bankers Standard Chartered (STAN.L)—was the favored suitor, all set to pick up a controlling stake in the South African telco. The Bharti proposal went to the MTN board on May 21. The deal floundered, analysts say, because of a regulatory hurdle. A not-so-ebullient debt market would have forced Bharti to cough up huge equity in a cash-and-shares deal that was expected to be around $20 billion. This would have increased the foreign stake in Bharti beyond the 74.5% limit set by Indian law.

MTN, it appears, was uncomfortable with that. "We knew that the MTN deal wasn't worth it for Bharti," says Hitesh Kuvelkar, associate director for research at Mumbai brokerage First Global Securities. His calculations showed that Bharti would not be able to "enjoy the same low-cost economies of scale in Africa like it does in India."

Colonial Past Complicates Matters

There were also political calculations on MTN's part. South Africa's leading telecom player wanted to soft-pedal the takeover aspect of the deal, a reflection of the sensitivity of a deal involving a company from India. (When both countries were under British colonial rule, many Indians moved to South Africa, and later the apartheid system classified Indians as a group separate from both whites and blacks.) MTN didn't want to be seen as selling out to an Indian company, say deal insiders. "It wasn't a question of who merged into whom, but who was seen to take over whom," says an investment banker close to the deal.

So the drama heightened. On May 22, MTN spurned Bharti's offer of a buyout with a counterproposal to make the Indian telco its subsidiary.

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