Two days after talks between Bharti Airtel [Get Quote] and MTN were called off, Reliance Communications [Get Quote] said it has signed a 45-day exclusivity agreement with the South African telecom company to discuss a "potential combination of their businesses".

This effectively means MTN will not talk to other potential bidders while discussions are on with the Reliance Anil Dhirubhai Ambani Group company.

MTN had not agreed to a similar exclusivity agreement with Bharti Airtel, with which talks broke down following differences over control of the combined entity.

Investment banking sources said both MTN and RCom have decided that they would not work on a merger. RCom has also said it would not look at either raising debt or expanding the company's equity base to accommodate new shareholders. Banking circles said the new structure under discussion would help MTN achieve its objective of expanding its footprint in India.

For RCom, MTN would offer its experience in running GSM networks. This is critical since RCom, which is a CDMA operator, will shortly launch a pan-Indian GSM network. MTN also has expertise in offering 3G services in South Africa, which RCom could leverage in India. MTN, on the other hand, could leverage Reliance's non-mobile business enterprise and its large submarine cable network across 60 countries.

Investment bankers said one option being discussed is whether both companies take a certain equity stake in each other and work as a consortium to address challenges in emerging markets.

Banking circles close to the new deal said the Bharti Airtel deal failed on the issue of foreign direct investment since a merger would have breached the 74 per cent FDI limit. Bharti chief Sunil Mittal, however, said the FDI limit was never the issue.

Meanwhile, RCom shares fell 5.08 per cent, closing at Rs 543.20. MTN's scrip also dropped 7.2 per cent at 144.70 South African rands on the Johannesburg Stock Exchange in morning trade following news that its negotiations with Bharti had fallen through. The company's share price had risen sharply after talks with Bharti on a takeover started in the first week of May.

A combination of MTN and RCom would create a telecom behemoth with over 115 million mobile customers across 23 countries. This is smaller than the Bharti Airtel-MTN combination (131 million customers), but would catapult RCom ahead of its key rival in the Indian market. Bharti Airtel has 17 million more customers than RCom (62 million and 45 million respectively).

A combination of the MTN and RCom 2008 balance sheets would create a $14.4 billion (Rs 58,000 crore) company, making it the second most profitable mobile operator after China Mobile, according to insiders working on the deal.

The combine would also have the largest Wimax footprint globally covering 3 billion people, nearly half the world's population. RCom's Wimax footprint is currently limited to India (where it has less than 22,000 customers) and 22 other countries in Asia Africa and Latin America. The combine will also have one of the world's largest optical fibre networks touching over 60 countries.