BANGALORE (Bloomberg) -- Reliance Communications Ltd., India’s second-largest mobile-phone operator, and South Africa’s MTN Group Ltd. ended discussions to combine their operations after threats by Reliance Industries Ltd. to block the transaction.

“Owing to certain legal and regulatory issues, the parties are unable to conclude a transaction,” Mumbai-based Reliance Communications and MTN, Africa’s biggest wireless-phone company, said in a statement yesterday, calling off the talks before their July 21 deadline for exclusive discussions.
The transaction, which would have created an operator with a user base more than double South Africa’s population, failed over a dispute between Reliance Communications Chairman Anil Ambani and his brother, Reliance Industries Chairman Mukesh Ambani. The phone company said July 17 it received an arbitration notice from Reliance Industries, which had threatened to block any sale in the carrier that didn’t give it a chance to buy the shares.
MTN has “done the right thing,” said Bruce Main, a fund manager with Ivy Asset Management in Johannesburg. “It would have become so complicated with the brothers wrangling.”
This is the second time in three months that Johannesburg- based MTN has failed to strike a deal with an Indian wireless operator. Bharti Airtel Ltd., India’s biggest mobile-phone company, said May 24 it ended talks with MTN after failing to overcome differences over ownership and management.
Valuation disagreement
The transaction also fell through because both companies couldn’t agree on valuations, the Indian Express newspaper reported on its Web site on Saturday, citing unidentified people.
MTN dropped 2.8 percent to 130.30 rand in Johannesburg trading, giving it a market value of 243 billion rand ($32 billion). The stock would be worth buying if it declined to 105 rand, Main said.
Reliance Communications lost 4.2 percent to 435.10 rupees in Mumbai trading. The statement was issued after both markets shut.
The deal would have been South Africa’s biggest and created a mobile-phone company with more than 116 million subscribers stretching from the Cape of Good Hope to the Himalayas.
“Investors are going to take this badly,” said Khulekani Dlamini, a fund manager at Renaissance Asset Management in Cape Town, which oversees about $224 million, including MTN shares. “It would have been nice to have had India in the picture, for MTN to have access to a market as big as India.”
MTN spokeswoman Nozipho January-Bardill didn’t immediately return messages on her mobile phone left by Bloomberg News. Gaurav Wahi, a Reliance Communications spokesman, declined to comment on Friday.
Brotherly dispute
Mukesh Ambani, 51, and Anil Ambani, 49, already are locked in a legal battle over the pricing of gas. The brothers split the Reliance Group in 2006 in an agreement brokered by their mother, widow of founder Dhirubhai Ambani.
Mukesh Ambani’s claim to have a right to buy a stake in Reliance Communications is based on a Jan. 12, 2006, document that was signed only by officials of Reliance Industries, Reliance Communications said last month. Anil Ambani had rejected the agreement at that time, the mobile-phone company said.
In November, MTN broke off talks with Telkom South Africa Ltd. to buy assets from Africa’s biggest fixed-line phone company, saying they were unable to reach an agreement.
MTN’s Chief Executive Officer Phutuma Nhleko has driven the company’s expansion north from South Africa into 21 countries throughout the continent and the Middle East, covering a region with a combined population of more than 500 million people.
The African operator aims to increase subscriber numbers by 36 percent to about 83.4 million this year in markets including Nigeria and Iran.