Update: Reuters reports that MTN has denied being in talks with Reliance Communications.

Earlier (June 2): Reliance Communications has put out a boilerplate notice saying that: ‘With reference to the news item appearing in a leading financial daily titled “Etisalat in talks to acquire 25% in Reliance Comm”, Reliance Communications Ltd has clarified to BSE that the Company has been receiving various proposals from time to time from reputed International Telecom Companies expressing interest in acquiring a strategic equity stake in RCOM. The Company evaluates such proposals, in line with the Company’s policy to constantly endeavor to enhance overall shareholder value.’

The statement was issued following a report in the Times of India, quoting “market sources”
suggesting that UAE owned telecom company Etisalat was looking to acquire 25% stake in Reliance Communications for around Rs. 18,000 crore, and post acquisition of stake, make an open offer for 20% more stake in the telecom company. Following this deal, the companys paid up capital would expand by 25%, though a majority 55% stake would still be held by ADA Group Chairman Anil Ambani. Ambani currently owns 67.58% in the BSE and NSE listed telecom operator. Following this report, Etisalat’s Chairman told Reuters that the company is looking to buy a stake in an Indian telecom operator, without specifically mentioning which.

Meanwhile, the Economic Times had also reported a few days ago, quoting “a person familiar with the development ” that South African telecom operator MTN was going to resume merger talks with Reliance Communications.

While no direct sources have been quoted, two factors must be kept in mind: Firstly that RCOM had sought a merger with MTN earlier, but that attempt was thwarted when Reliance Industries reportedly claimed to have first right of refusal on RCOM stake. The issue with Reliance Industries has now been resolved, so RCOM is free to merge or sell stake.

Secondly, that Etisalat currently has a microscopic share on the Indian telecom market, with services having been activated (brand name Cheers), but not really “launched”. As of April 30th 2010, the Etisalat DB-Allianz combine had only 4990 connections, out of a total 601,223,959 mobile connections believed to be active in India, so a search for acquisitions would probably for acquiring subscribers, and not spectrum: The company also reportedly withdrew from the recently concluded 3G Auction,  according to a report in Zawya, the 3G auction breached the $2 Billion mark.

But I’m wondering about how Etisalat, which already owns 45 percent share (bought for $900 million) in Swan Telecom (renaming it Etisalat DB), could consider acquiring stake in another telecom operator. Under the telecom M&A rules, Etisalat can’t own more than 10% stake in another telecom operator.