Vodafone India and Idea Cellular on Monday unveiled the contours of a $23-billion no-cash merger which will create India’s biggest telecom company with revenues of over R80,000 crore, 400 million customers and a 41% revenue market share. The share swap implies an enterprise valuation for Vodafone India of R82,800 crore and that for Idea Cellular of R72,200 crore. This valuation excludes Vodafone’s 42% stake in Indus Towers and Idea’s holding in the tower company of 11.15%.
With 1850 MHz of spectrum in its kitty, the new entity should be better positioned to take on Reliance Industries’ RJio, which has disrupted the market with a low-priced data offering and which is chasing a 50%-plus revenue market share target by FY21.
The 1850 MHz of spectrum includes 1645 MHz of liberalised spectrum capable of building substantial mobile data capacity, utilising the largest broadband spectrum portfolio with 34 3G carriers and 129 4G carriers. Vodafone chairman Vittorio Colao indicated at a press conference the merger would result in savings of $2.1 billion annually by the fourth year post-completion as resources including people, networks and spectrum are shared. Analysts nevertheless believe some capital infusion would be required sooner rather than later.
The merger will lead to a breach of spectrum caps — 25% in a circle and 50% in a band — in five circles: Kerala, Gujarat, Haryana, Maharashtra, and Uttar Pradesh (West) in the 900 MHz band and in Gujarat and Maharashtra also in 2500 MHz, necessitating the surrender of excess spectrum.
Moreover, the 50% cap on revenue market share would also be breached in Haryana, Kerala, Maharashtra, and UP (West). However, once Reliance Jio Infocomm starts charging subscribers and gains revenue market share, this problem should ease.
By pooling their spectrum in the 900 MHz band, Vodafone and Idea can create a 10-MHz block in seven of the 22 circles without harmonisation. These would be Delhi, Gujarat, Haryana, Kerala, Maharashtra, Mumbai, and UP (West). Likewise, in the 2100 MHz band, they would be able to create a contiguous block of 10 MHz or more in Gujarat, Kerala, Kolkata, Maharashtra, and Mumbai without harmonisation. In circles like Rajasthan, Tamil Nadu and UP (East), they can create a block of 15 MHz post-harmonisation.
In 2500 MHz, the duo would be able to create a 20-MHz block in 13 of the 22 circles. In terms of the merger specifics, Idea Cellular will issue 180 crore new shares to Vodafone at an implied value of R72.50 per share, the price on January 27, leaving the Aditya Birla Group with a 21.1% stake in the new entity. The AB Group will buy another 4.9%, at a price of R108 per share, the closing price on Friday, March 17, to take its stake up to 26% in the combined entity.
Kumar Mangalam Birla, chairman, AB Group, said on Monday that the Idea scrip had been trading at R72.50 on the day the news of the merger leaked and consequently this price had been considered for issuing shares to Vodafone.
Following the merger, Vodafone will hold 45%, Idea’s promoters 26% and the public 29%.
The AB Group also has the option to pick up additional shares at a price of Rs 130 per share — within three years — to equalise its stake with that of Vodafone’s. Until the stakes are equal, voting rights for the partners will be capped at 26%.
The new entity’s revenues of R80,000 crore, while smaller than Bharti Airtel’s consolidated revenue of R96,532 crore (FY16), is nonetheless bigger than Bharti’s India revenues of R70,843 crore.
The deal is expected to be closed in calendar year 2018.
Birla will be the chairman of the combined entity in accordance with the AB Group’s right to appoint the chairman as one of its three directors. Vodafone will have the sole right to appoint the chief financial officer. Both Vodafone and the AB Group will jointly appoint the CEO and chief operating officer.
The combined debt of Vodafone-Idea will stand at Rs 1.07 lakh crore. Prior to the completion of the deal, Vodafone and Idea intend to sell their standalone tower assets and Idea’s 11.15% stake in Indus Towers to reduce leverage in the combined entity. Vodafone said it will also explore strategic options for its 42% stake in Indus Towers; potential options include either a partial or a full disposal.
If the AB Group wants to acquire the additional 9.5% stake after three years, the share price prevalent at the time will apply. If after five years the shareholdings of both partners are not equal, Vodafone will sell down its stake to the level held by the Idea promoters. Both Vodafone and the AB Group have the right to nominate three directors each on the board.