Hello Brother!

Indian Companies are truly enjoying the romantic weather for acquisition by wooing foreign giants. After the exit of Bharti from the talks, Anil Ambani led Reliance Communications (RCOM) has pitched in to bid for the acquisition of the South-African Telecom giant MTN. Both the companies have come into an exclusive 45 day agreement to conduct talks for the negotiations. The deal is estimated to create a combined entity worth about 70 billion dollars and could have operating profits higher than RIL, India's biggest private sector firm. MTN has 70 million customers in 21 countries spanning from Asia to Middle East to Africa. The Economic Times report that the proposed EBITDA (Earnings before Interest, Tax, Depreciation, Allowances) of RCOM-MTN combine would be INR 45,000 crore, 50% more than that of RIL, for 2009. But, Anil Ambani's ride of fancy struck a roadblock, this time in the form of none other than Big Bro Mukesh Ambani led RIL.

What is the Dispute?

Reliance Industries Limited (RIL), India's largest private sector company, claims that it holds the Right of First Refusal in case of Sale of RCOM as per the Jan 12, 2006 agreement. RCOM argues that the agreement was unilaterally signed only by RIL officials when the ADAG companies - Reliance Communicaions, Reliance Capital and Reliance Energy were still with Mukesh Ambani led Reliance group and the Anil Dhirubhai Ambani Group came into existence a month after the agreement. Also, they point out that no such clause was included even in the Article of Association of RCOM. It alleges that the objection by RIL is purely driven by the intent to sabotage the deal and it would vigorously defend any legal action (if taken) by the latter.

On the other side, RIL counter argues that the validity of the agreement has never been questioned by RCOM ever since it was signed and if the deal goes ahead, RIL will sue RCOM for damages and compensation at the same time treating MTN as a defendant for the breach of Agreement. RIL has written to MTN as well as the Investment Bankers / Intermediaries involved in the deal, clarifying its stand.

What is Right of First Refusal ?

The Right of First Refusal enables its holder a privilege to come in transaction with the owner (seller) before the owner (seller) goes ahead with transacting (selling) it with (to) another party. In this case, if the Agreement is deemed valid, RCOM is bound to first offer RIL if it interested to buy RCOM.

I AM SURE YOU MUST BE HIGHLY CONFUSED BY NOW with thoughts popping up like - "But, RCOM is not selling itself.. rather it is going to acquire MTN.. so why does RCOM need to first offer its sale to RIL...?? etc. etc.".

The Catch is that if the deal is successful, first MTN will go for a complete buyout of RCOM and then, ADAG will acquire the controlling majority shares in MTN. So, the deal involves a step where RCOM has to first sell itself! :)

Action/Reaction:

So, what could be the motivation of RIL chipping in and showing Yellow Light to the two Telecom Majors ? Is it purely driven by sibling rivalry between the two brothers in the quest to outperform each other professionally? Though the two bros share the same 18 story mansion "Seawind" at Cuffe-Parade in Mumbai, when it comes to dhandha, none of them shies away from locking horns on a business issue. Its true that after the death of their father Late Mr. Dhirubhai Ambani, the two have emerged as the strongest Warriors of Indian Corporate Arena but at the cost of a bonding which most likely once existed when they were kiddos!
In this Number Game of millions and billions of dollars which is beyond the personal spending capability of any human being in his lifetime, power and more power is probably what keeps the honchos motivated.

In this dispute, which Brother takes an edge is still to be seen but one thing is for sure that its a battle being fought within the Closed System called - AMBANIS!

- Sharma