NEW DELHI | MUMBAI: India’s telecom industry will soon ring in a new order. Vodafone India and the Kumar Mangalam Birla-owned Idea Cellular are to merge to create the country’s biggest phone company by subscribers, dislodging Bharti Airtel, which has been at the top for 15 years. The new Rs 1.55 lakh crore entity will also be the world No. 2 after China Mobile.
The deal will see Aditya Birla Group, the promoters of Idea, gradually raising its stake in the combined entity while Vodafone Group will reduce its own, with the aim of both holding equal stakes over a period of time.
As a first step, AB Group will acquire 4.9 per cent from Vodafone for Rs 3,874 crore, or Rs 108 a share, to take its stake to 26 per cent, with Vodafone holding 45.1 per cent. Further, the company will have the right to buy another 9.5 per cent (at Rs 130 a share or the prevailing markprice, depending on the time of purchase) in the combined entity over four years from the British telecom firm.
Kumar Mangalam Birla will be the chairman of the new entity. Vodafone will name the chief financial officer while the two companies will jointly name the CEO and operations head before the closure of merger, expected within 24 months. The new entity will remain listed and be renamed at a later stage. The promoters of Idea and Vodafone will have the right to nominate three members each on the board, which will have 12 directors, six of whom will be independent.
The Idea stock, which had risen after merger talks were made public in January, surged 15 per cent initially on Monday, only to close nearly 10 per cent lower on the BSE as investors deemed the upside had been capped at Rs 130.
UK-based Vodafone Group Plc’s India unit and Idea, currently ranked at two and three, respectively, will have a combined nearly 400 million subscribers, 35 per cent of all customers and 41 per cent revenue market share. The merged entity, with its scale, size and synergies, will be a stronger rival to Reliance Jio Infocomm, which has disrupted the market with free voice and data offers and forced the two to combine.
The merger ratio is based on Idea’s price of Rs 72.5 a unit. The companies added that implied enterprise value is Rs 82,800 crore for Vodafone India and Rs 72,200 crore for Idea, excluding its 11.15 per cent stake in Indus Towers. All of Vodafone India’s businesses, barring its 42 per cent stake in Indus Towers, will become part of the new entity. Malaysia’s Axiata, which holds around 20 per cent in Idea, will see holding diluted proportionately. The company said its next step will be based on maximising benefits to shareholders.
“This landmark combination will enable the Aditya Birla Group to create a high-quality digital infrastructure that will transition the Indian population towards a digital lifestyle and make the government’s Digital India vision a reality,” Aditya Birla Group chairman Kumar Mangalam Birla said in the statement.
Under the merger terms, AB Group has the right to increase its stake from 26 per cent by buying another 9.5 per cent from the UK telco at Rs 130 apiece in three years, within which time frame both companies can’t buy or sell any shares from or to a third party. If Idea still hasn’t raised its stake adequately in that time, it still has the option to buy the remaining shares needed to equal Vodafone’s shareholding within the fourth year, but at prevailing market rates.
If Vodafone and the Aditya Birla Group’s shareholdings in Idea are still not equal at the start of the fifth year, the UK company will sell shares in the combined entity to bring it on par with that of the Indian group over the next five years. Until the share equalisation is complete, additional shares held by Vodafone will be restricted and votes will be exercised jointly, the statements added.
Birla later told reporters that any funding needed to raise the group’s stake won’t come from its listed companies. He said there will be no significant downsizing after the merger.
The merger will result in the Indian telecom landscape being dominated by three strong private firms – Vodafone-Idea, Bharti Airtel and Jio – along with state-owned BSNL. It will possibly begin the process of renewing price discipline in an industry rocked by Jio’s disruptive entry.
Idea Cellular managing director Himanshu Kapania expects the industry to return to double-digit growth in 12-18 months. The company posted its first net loss since listing in 2007 in the December quarter, hurt by the price war following Jio’s offerings.
Last year, Vodafone was forced to write down value of its India business by over Rs 36,000 crore and infuse over $7 billion, which has been struggling to stay competitive amid severe competition.
“We now have a bigger listed company with a lot of value, lots of assets, spectrum, can compete in the future very effectively. It will give higher return on capital to investors because we have higher scale,” said Vodafone Group chief executive Vittorio Colao.
Speaking exclusively to ET, Colao looked back at Vodafone’s India story since 2007 when it entered the country, and called the regulatory environment here “complicated.” He noted that while it has enjoyed growth, it has had to deal with issues such as high taxes and spectrum prices.
“India is a complicated environment – we have got taxes, but also daily requests for taxations. I do think that the spectrum has been sold at a very high price. Probably too high a price,” he said, but added that the company wasn’t planning to exit what is still the world’s fastest growing market by subscribers.
He added that the long-standing Rs 20,000-crore tax dispute with the Indian authorities has nothing to do with this transaction. “There is an arbitration between Vodafone Group Plc and the government, and the government has indicated it wants this arbitration to continue. The judicial process is to follow,” he said.
Colao said both Idea and Vodafone, which first announced merger talks back in January, will continue to operate as independent brands in India. “We are very complementary. Idea is strong where Vodafone is weaker. Vodafone is strong where Idea is weaker,” he said, referring to the fact that Vodafone is typically stronger in urban areas while Idea is better placed in rural and semiurban regions.
The telecom industry is in the grip of consolidation. Reliance Communications, Aircel and MTS are working on a merger while Bharti Airtel recently announced it was taking over Telenor’s India business.
Poor financial health of the sector is behind the trend, said Rajan Mathews, director general of Cellular Operators Association of India . He, however, said this was a positive development benefiting customers, operators and the government.
Vodafone will contribute Rs 2,500 crore ($369 million) more net debt than Idea upon closure of merger. Based on Idea’s net debt of Rs 52,700 crore at December end, Vodafone would contribute Rs 55,200 crore of net debt to the merged entity.
“The combined entity would thus remain highly leveraged, and need some form of capital infusion,” Credit Suisse said in a note.
Prior to completion of the deal, Vodafone and Idea intend to sell standalone tower assets and Idea’s 11.15 per cent stake in Indus Towers to reduce debt in the combined company. Vodafone will also explore strategic options for its 42 per cent in Indus Towers, including partial or a full sale. Both companies are reported to have been in talks to sell tower businesses.
The Idea-Vodafone pact also has a break-fee of Rs 3,300 crore ($500 million) that would become payable under certain circumstances. They didn’t elaborate. Vodafone, which entered India in 2007 by buying Hutchison Whampoa’s 67 per cent in Hutchison Essar, will be separated from the parent, and will be treated as a JV, reducing Vodafone Group net debt by Rs 55,200 crore and leverage by around 0.3x net debt/Ebitda. The transaction is expected to be accretive to Vodafone’s cash flow from the first full year post-completion.
Vodafone and Vodafone India were advised by Morgan Stanley, Robey Warshaw, Bank of America Merrill Lynch, Kotak Investment Bank, Rothschild and UBS. Vodafone stock was down 0.6 per cent on LSE at 21:06 local time.
Why Did the Idea Stock Surge and Plunge?
The Idea stock, which jumped over 15% in early trade on Monday, closed 9.6% down at Rs 97.60 on the BSE. Market watchers said Vodafone agreeing to sell its 9.5% stake to Idea over the next three years at Rs 130 apiece had capped the upside for investors, that too with all operational synergies factored in. Stock had reached an intraday high of Rs 123.75 and had a 52-week high of Rs128.05. “Investors are now asking what’s the bottom, rather than what’s the next trigger,” said an investor.Credit Suisse said in a note: “We would look at this Rs 130 as higher than a realistic fair value ceiling of the business from Vodafone’s perspective – likely to be realised 2-5 years from today. This implies a 5-14% annualised return on current stock price. The risks to this include 1) timelines of deal completion 2) full extent of below synergies being realised.”
Savings, Synergies, Spectrum
The merger will create cost and capex synergies for both companies -an estimated net present value of around $10 billion after integration costs and spectrum liberalisation payments, with an estimated runrate savings of $2.1 billion on an annual basis by the fourth year after completion of the merger.
“Operating cost savings represent 60% of the expected run-rate savings,” the companies said.
The major cost and capex synergies would be around network infrastructure, operational efficiencies, lower maintenance expenses, savings in energy costs, redeployment of overlapping equipment from rationalised sites resulting in lower capex, service centres, back office and distribution efficiencies, streamlining regional and nationwide IT systems and evolving to a single IT system besides optimising general costs.
But the entity would also face some regulatory hurdles, mainly to do with liberalising administratively allocated airwaves and exceeding spectrum holding and market share limits in six circles each, which the companies need to conform with in a year of the merger’s completion.
“Spectrum liberalisation costs are expected to have a net present value impact of approximately ‘3,000 crore ($0.5 billion),” the companies said.The new entity would hold 1,850 MHz, including about 1,645 MHz of liberalised spectrum acquired via auctions, the rest of which it will have to pay market fee for, since this were allotted to the company without auctions.
The combined entity will exceed revenue market share limits of 50% in Gujarat, Haryana, Kerala, Maharashtra, Madhya Pradesh and Uttar Pradesh (West). Kerala is the toughest case because it will have a 65% share, analysts said. Colao said the entity will exceed spectrum caps in six circles. Vodafone will have to return that based on M&A rules. “Very small amount. If there is a value, we will be happy to get the money , else we’ll give it back to the government,” he said.
Source: Economic Times