RCOM, MTN reportedly close to share swap deal

RCOM, MTN reportedly close to share swap deal

Reliance Communications (RCOM) and South African telecom major MTN Group arereportedly close to finalising a reverse merger deal under which RCOM will become asubsidiary of the MTN Group and its chairman Anil Ambani will initially hold 28-30% inthe merged entity, which would make him the largest shareholder. The deal wouldcreate a telecom colossus with 115mn subscribers in 25 countries. Ambani, whoholds 66% in RCOM, may then buy another 4-6%, either through market operationsor from shareholders to reach a 34% shareholding in MTN through an all-cash deal.MTN's promoters will hold the remaining 65% stake in the merged entity. The dealalso requires MTN to make an open offer to RCOM shareholders to make it asubsidiary. Under Indian laws any company acquiring more than 15% has to make anopen offer. The specifics of the shareholding structure will depend on the share-swapratio, which is yet to be decided. Ambani is likely to be nominated the chairman of thecompany and current MTN CEO Phuthuma Nhelko will continue as the executivehead of the merged entity.In related news, in one of the largest-ever direct-to-home (DTH) set-top box contractsin the country, RCOM has placed an order for 5mn boxes with vendors from Korea,China and Taiwan to be delivered between July and December next year. Thevendors include Hyundai, UEC, Thomson, Hunmax, Homecast, Koship and KaonMedia. The current landed cost of an MPEG4-enabled set top box in the globalmarkets ranges between US $50-60 based on the size. RCOM is looking atinnovative ways to reduce the overall cost of set top boxes by up to 25%, therebyprocuring MPEG4 set top boxes at prices lower than the prevailing MPEG2 boxes.The company, which plans to launch its DTH services under the Big TV brand, hasalready placed orders for the launch, scheduled in a few weeks. RCOM has alreadyreceived stocks of close to 2.5lakh set-top boxes in its warehouse and anothershipment of 2.5lakh set-top boxes is scheduled to arrive in a week’s time. Potentialfor the DTH business is significant going ahead and this business is seen as a majorrevenue earner for RCOM in the future. Nonetheless, the company will face toughcompetition from Dish TV with around 3.2mn subscribers and Tata Sky with around2mn subscribers.

We maintain a Buy on the stock with a Target Price of Rs763.