The Vodafone Group has agreed to merge its Indian business with Idea Cellular to create the country’s largest telecom operator. The combined entity will have 400 million subscribers, 35 per cent customer market share and 41 per cent revenue market share. It will have adequate spectrum to compete effectively with other major operators in the market. It will hold 1,850 MHz of spectrum, including 1,645 MHz of liberalised spectrum. It will also have the largest broadband spectrum portfolio with 34 3G carriers and 129 4G carriers across the country.
Vodafone India’s strong presence in metro circles and Idea’s leadership in semi-urban and rural telecom markets will allow for potential leadership in most of the circles. Moreover, the combination of networks and spectrum holdings, backed by continued investments by both companies, will accelerate the proliferation of high speed wireless broadband services across the country. This, in turn, will boost the uptake of digital content and internet of things, and help realise the government’s Digital India vision and financial inclusion goals.
Key features of the deal
- Idea will contribute all its assets including its stand-alone towers with 15,400 tenancies and 11.15 per cent stake in Indus Towers. Meanwhile, the Vodafone Group will contribute all the assets of Vodafone India including its stand-alone towers with 15,800 tenancies but excluding its 42 per cent stake in Indus Towers.
- The merger ratio implies an enterprise value of Rs 828 billion ($12.4 billion) for Vodafone India and Rs 722 billion ($10.8 billion) for Idea’s mobile business (excluding its 11.15 per cent stake in Indus Towers).
- Vodafone’s contribution of net debt will depend on Idea’s net debt at completion as well as customary closing adjustments. Vodafone will contribute Rs 25 billion ($369 million) more net debt than Idea at completion.
- Vodafone will own 45.1 per cent stake in the combined entity after transferring 4.9 per cent stake to the Aditya Birla Group for Rs 39 billion ($579 million) in cash. The Aditya Birla Group will then own 26 per cent stake in the company and Idea’s shareholders will own the remaining 28.9 per cent.
- The Aditya Birla Group has the right to acquire up to 9.5 per cent additional stake from Vodafone under an agreed mechanism to equalise the shareholdings over time. If the former does not equalise its stake, Vodafone will reduce its ownership in the combined entity to equalise its shareholding to that of the Aditya Birla Group.
- Before the completion of the transaction, Vodafone and Idea intend to sell their stand-alone tower assets and Idea’s 11.15 per cent stake in Indus Towers to reduce leverage in the combined entity. Vodafone will also explore strategic options for its 42 per cent stake in Indus Towers; potential options include either a partial or a full disposal of the holding.
- Since Vodafone and the Aditya Birla Group will jointly control the combined entity, Vodafone will deconsolidate Vodafone India immediately. After the closing of the deal, the combined entity will be reported as a joint venture by Vodafone and accounted for under the equity method, resulting in a decrease in Vodafone’s net debt.
Synergies
Synergies and cost savings will be realised on account of network infrastructure rationalisation, lower maintenance expenses, reduced energy costs, a higher spectrum footprint and a larger single radio access network. Further, redeployment of overlapping equipment can be done from rationalised sites, resulting in lower capex. The companies will streamline regional and nationwide IT systems. In addition, the deal will bring about operational efficiencies and optimisation in general and administration costs. Capex synergies and run-rate cost savings are expected to reach Rs 140 billion ($2.1 billion) on an annual basis by the fourth full year post completion of the merger. Operating cost savings are expected to amount to 60 per cent of the run-rate savings.
Governance and management
The board of the combined entity will comprise 12 directors – three directors each appointed by Vodafone and the Aditya Birla Group, and six independent directors. The Aditya Birla Group has the sole right to appoint the chairman (as one of its three directors). It has recently appointed Kumar Mangalam Birla to the post. Meanwhile, Vodafone will have the sole right to appoint the chief financial officer. Both Vodafone and the Aditya Birla Group will jointly appoint the chief executive officer (CEO) and the chief operating officer.
The way forward
The companies are keen on maintaining appropriate leverage prior to the closing of the deal. The new company is expected to be self-funded going forward. This will be backed by the expected sale of Idea and Vodafone India’s stand-alone towers as well as Idea’s 11.15 per cent stake in Indus Towers. The name of the combined entity will be changed eventually and the brand strategy will be developed in due course.
The transaction is subject to approvals from the relevant regulatory authorities. In addition, shareholder approval will be required from Idea’s shareholders. However, it is not subject to approval from Vodafone’s shareholders. The merger is expected to conclude during the 2018 calendar year.
The companies anticipate some regulatory dis-synergies though, mainly on account of spectrum liberalisation payments, and the requirement to meet regulatory spectrum caps and market share thresholds in some circles. Spectrum liberalisation costs are estimated to have a net present value impact of Rs 30 billion approximately.
The deal, which is the biggest ever in the industry, comes at a time when the competitive intensity has reached high levels following the entry of Reliance Jio Infocomm Limited. The merger will result in stronger operational metrics and higher profit margins, promising long-term growth for the merged entity.
Akanksha Mahajan Marwah
