Reliance RCom: Destination South Africa?

By Priya Nigam 

Telecom South Africa?Anil Ambani goes to South Africa for a vacation and comes back with a deal to enter the country’s burgeoning telecom market! Okay, not quite. The chairman of the ADA Group is still in talks with South Africa's leading telecom player MTN Group and no deal has yet been inked. Earlier this week, Reliance Communications said it had begun “exclusive negotiations” with MTN for a “potential combination of their businesses.” “Exclusive negotiations” means that during this period (agreed upon as 45 days), MTN will not initiate talks with any other potential bidder. 

Only three days prior to RCom’s announcement, the South African telecom firm was in talks with India’s leading mobile operator, Bharti Airtel. Those discussions were terminated due to lack of agreement over control of the combined entity. Incidentally, both Bharti Airtel and RCom had said earlier that they would not be considering mergers in a hurry. 

So, what opportunity does a deal with MTN hold for RCom? Well, to begin with, South Africa is one of the last under-penetrated telecom markets. While RCom does address a huge and growing market in India, it has kept a global perspective (and rightly so). Earlier in February, the company forayed into the overseas mobile market with the acquisition of Uganda-based Anupam Global Soft. An entry into the South African market would strengthen RCom’s position as a global telecom player. 

Moreover, MTN has experience in running GSM (global system of mobile) networks. RCom, which is predominantly a CDMA operator, has already identified GSM as its growth area. The company plans to launch a pan-Indian GSM network. RCom could also benefit from MTN’s expertise in 3G services. A combination of RCom and MTN would create a telecom giant, with more than 115 million mobile customers and with a presence in over 23 countries. 

MTN has a larger subscriber base and higher market capitalization than RCom. It is to be seen what kind of deal the two telecom companies agree to (if any). It’s difficult to imagine RCom agreeing to become a subsidiary of MTN (which is what the South African telecom major was proposing to Bharti Airtel).  

Reliance ADA Group has been investing in various industries (telecom, infrastructure, entertainment and power) and has massive, complex plans to execute. Catalysts may take time to play out and uncertainties surrounding the outcome of talks with MTN mean that RCom shares are certainly not a good near-term investment.