Official: Reliance Communications in talks with Etisalat, AT&T and MTN Group for stake sale

By Erika Kinetz, AP
Monday, June 7, 2010

Reliance Communications approves stake sale

MUMBAI, India — India’s Reliance Communications has approved a plan to sell a minority stake to a bidder like Etisalat, AT&T or MTN Group, sending its stock up as much as 6.5 percent in Monday trading.

Reliance said Sunday its board has approved selling up to a 26 percent equity stake to strategic or private equity investors, and gave the go-ahead for other “strategic combination opportunities.”

The company named no potential suitors, but an official with knowledge of the talks said Monday that discussions were most advanced with Dubai-based Emirates Telecommunications Corp., or Etisalat, for a 26 percent stake sale valued around $4 billion.

The official, who spoke on condition of anonymity because discussions are ongoing, said Reliance Communications was also in “exploratory talks” for a similar deal with AT&T and South Africa’s MTN Group.

Reliance Communications executives have spoken with executives from AT&T and MTN, but formal talks have not commenced, he said.

Reliance, controlled by billionaire Anil Ambani, is the only major Indian telecom not to have a foreign partner.

A prior effort to bring in an outside investor — South Africa’s MTN Group — through a share swap was blocked by Anil’s older brother Mukesh in 2008, who said a noncompete clause in a family agreement gave him right of first refusal over Reliance Communication shares.

The official said Monday that the companies are not considering rekindling that equity swap model, but are focused instead on a possible minority stake sale.

The two brothers scrapped their noncompete clause two weeks ago, after the Supreme Court ordered them to renegotiate a gas sale agreement that was also enshrined in the family memorandum, which divided their father’s empire.

Reliance, India’s second largest mobile phone company with 109 million subscribers, had net debt of 199 billion rupees ($4.4 billion) on March 31, and it just had to pay the Indian government an additional 85.9 billion rupees ($1.8 billion) for third-generation spectrum. It is also likely to require fresh capital to roll out 3G and Wimax services.

Etisalat has told reporters that it is exploring several options in India, including a deal with Reliance, but its bid would be complicated by Indian regulations, which prohibit existing players from owning more than 10 percent in a competing telecom firm.

Etisalat paid $900 million in 2008 for a 45 percent stake in Swan Telecom, controlled by Indian real estate group DB Reality. That venture has been slow to get off the ground.

AT&T declined to comment on media reports that it has entered informal discussions about a potential transaction.

Analysts say AT&T could be looking abroad for growth now that the U.S. cell phone market is close to saturation, with the number of active cell phones now about 90 percent of the population. The number of new U.S. contract subscribers at AT&T plummeted in the first quarter to the lowest level since 2004.

AT&T invested early in the Indian mobile market, but left in 2005 with the sale of its stake in Idea Cellular.

South Africa’s MTN Group has reportedly denied that it is exploring resuming merger talks.

India has the fastest-growing large telecom market in the world, with 600 million subscribers expected to grow to 860 million in four years.

But with 15 companies competing for subscribers — many of whom want low-cost rather than premium services — call rates have plummeted to less than one cent a minute in some cases, driving down margins.

That’s creating problems for both domestic and foreign players.

Reliance Communications saw net profit slip 25.5 percent, to 12.2 billion rupees ($258.4 million) from the first to the fourth quarter last fiscal year, despite adding 28,806 subscribers.

The U.K.’s Vodafone group, which paid $11.2 billion for a controlling stake in Hutchison Essar in 2007, last month wrote down the value of its India business by 2.3 billion pounds ($3.3 billion) because of the price war.

It is also fighting a legal battle with the Indian tax department, which on Friday said it owes 120 billion rupees ($2.5 billion) in taxes on the 2007 acquisition.

In an appeal to Mumbai’s High Court on Monday, Vodafone again argued that India lacks jurisdiction, because neither the buyer nor the seller were based in India. A Netherlands-based unit of Vodafone bought the shares from Cayman Islands-based Hutchison Telecommunications International.

The legal battle has dragged on for nearly three years.

Despite the cutthroat competition and regulatory complexity, Crisil Research head Manoj Mohta says India remains attractive to foreign telecoms looking for growth.

“The number of subscribers we’re adding on an annual basis is larger than the subscriber base in most geographies,” he said.

The only way for foreign players to enter India now is through a tie-up with a local provider, preferably one with an established brand, he said.

“As of now no one can come on a stand alone basis. The licenses are not available,” he said.

AP Technology Writer Peter Svensson in New York contributed to this report.

will not be displayed