Exit Bharti, Enter Reliance in MTN Tango

Two days after merger talks with Bharti Airtel collapse, South African telco MTN Group begins negotiations with Bharti rival Reliance Communications.

Ambani's Reliance Communications had begun exclusive negotiations with MTN for a potential combination of their businesses.

Potential $63 Billion Juggernaut

What attracted Reliance, India's No. 2 telecom operator, to the MTN deal, just when it soured for rival Bharti. The chance to become a leading global telecom player. Africa has been on the radar for both Bharti and Reliance, as it's the last of the underpenetrated telecom markets.

The Bharti proposal went to the MTN board on May 21. The deal floundered, because of a regulatory hurdle. A not-so-ebullient debt market would have forced Bharti to cough up huge equity in a cash-and-shares deal that was expected to be around $20 billion. This would have increased the foreign stake in Bharti beyond the 74.5% limit set by Indian law.

Colonial Past Complicates Matters

There were also political calculations on MTN's part. South Africa's leading telecom player wanted to soft-pedal the takeover aspect of the deal, a reflection of the sensitivity of a deal involving a company from India.

The drama heightened on May 22, MTN spurned Bharti's offer of a buyout with a counterproposal to make the Indian telco its subsidiary.

For first Bharti and now Reliance, the dalliance with MTN is part of an ambitious global expansion plan. The two Indian companies already operate in one of the largest and most dynamic emerging markets in the world, and dream about being global players with special skills in providing low-cost, high-quality mobile service to the developing world.

Skepticism About Reliance's Follow-Through

There is no doubt MTN is a big opportunity for Reliance. But not everybody is impressed. Reliance is known for making dramatic announcements. Investors, however, wonder about the company's ability to follow through. Reliance Communications' stock is down 5.63% in the last three days. Analysts are concerned about the risk of Reliance spreading itself too thin, given the group's acquisition of assets across different but difficult sectors like infrastructure.