A week after Ambani brothers have struck truce there are all kinds of rumors being floated by folks close to the management. At first it was RCom merging with MTN in Africa, which looks a bit difficult. The new rumor that surfaced today with Heavy Buying in RCom stock is Etisalat DB bidding for 25% stake in Reliance Communications for a whopping USD 4Bn thus valuing the former at USD 16 Bn compared to current market cap of USD 6.5 Bn. The deal can go through but I don’t believe it would be based at an expensive valuation, given other available options for Etisalat.
Etisalat has invested USD 1bn for its stake in the Indian venture (Etisalat owns 45% stake in its Indian venture and the rest is largely held by the Dynamix Balwas (DB) Group), Etisalat is unlikely to exit due to the potential loss on its initial investment. Prevailing M&A norms do not allow the merged entity to have any spectrum advantage. Etisalat does have a good balance sheet with USD 4 Bn Cash but a ~100% premium valuation for RCom is uncalled for in my view, especially when they have a range of options.
Facts to Know about RCom and Etisalat
- Etisalat DB venture is in a 10 year passive infrastructure sharing agreement with RCom
- CBI investigation about Ambani’s stake in Swan Telecom is under scanner [ Earlier Name before DB Group]
As pointed by global media and leaked CBI and IT investigation documents, their appears to be heavy Money Laundering and massive Tax evasions by Indian Corporates in the Telecom sector.
Etisalat has been trying a while to become a telecom provider themselves, for a while. Anyway, it would be interesting to see if Anil Ambani does end up selling a 25% stake in the most profitable company under his umbrella.