South Africa's MTN and Reliance Communications are discussing a deal in which MTN would take a 74 percent stake in India's No 2 mobile operator in a cash and stock swap deal, a leading Indian news daily said on Friday.
Indian law permits foreign firms to own up to 74 per cent in local telecom firms. The Anil Dhirubhai Ambani Group (ADAG), chaired by Anil Ambani, owns 66 per cent in the Indian firm, with foreign investors owning 11 percent, the paper said.
MTN and Reliance Communications said on Monday there were in exclusive talks for a potential combination of their businesses, which could create a top 10 global telecoms firm.
The newspaper, citing unnamed sources, said MTN would sign an agreement to take up to 74 per cent in Reliance Communications through a share swap, with minority shareholders given the option of selling their shares in an open offer.
The deal would see Ambani emerge as the largest single shareholder in MTN, which would have Reliance Communications as a subsidiary, the paper said.
Under Indian law, once MTN had acquired 15 per cent of Reliance Communications it would have to make an open offer for a further 20 per cent. The paper said the deal would be structured so the open offer could be filled out of ADAG's holdings if minority shareholders did not subscribe.
If no existing foreign shareholders accepted the open offer but it was fully subscribed by local investors, making their shareholdings foreign owned, MTN could only get a 43 per cent stake of Reliance Communications from ADAG so as not to breach Indian law on 74 per cent ownership.
If foreign shareholders all accepted the offer but local shareholders did not, ADAG could swap 63 per cent of its stake in Reliance Communications for MTN stock, giving MTN a 74 per cent stake in Reliance Communications.
So Ambani would end up swapping between 43 and 63 per cent of his holding in Reliance Communications for a stake of 28 to 34 per cent in MTN, staying below the 35 per cent mark beyond which he would be required to make an open offer for MTN under South African law, the paper said.
"This is one of the possibilities RCOM is weighing as it tries to strike a deal with MTN," the paper said, citing sources close to the development.
"The broad contours of the deal thus indicate that Ambani will emerge as the largest shareholder of MTN and RCOM will be its subsidiary," the paper said.
Both firms are trying to reach an agreement on the management control, and due diligence is expected to begin within a couple of days, it said.
The FT Alphaville website on Thursday said Reliance Communications was prepared to pay a significant premium for control of MTN, either through a bid of cash and shares, or by taking 34.9 per cent in MTN.
Shares in Reliance Communications rose more than 6 per cent on Thursday after Macquarie Research said a potential deal would be positive.