March 20, 2017
Vodafone, the UK-based mobile phone operator, has struck a deal to merge its Indian operations with local rival Idea Cellular to create one of the world’s largest telecoms groups, with a combined implied enterprise value of more than $23bn.
The two companies on Monday confirmed the deal, which is the second merger in the sector in as many months, as telecoms operators scramble to respond to an aggressive foray into the industry by oil products group Reliance Industries.
The industry consolidation is aimed at finding economies of scale after Reliance Jio ploughed $25bn into a pan-national 4G data service, and announced tariffs well below prevailing rates as well as providing free services for six months.
Last month Bharti Airtel fired the starting gun on defensive dealmaking with plans to buy the Indian business of Norway-based Telenor.
After the merger of Vodafone India and Idea, which is expected to close in 2018, the combined group would be India’s largest mobile phone operator, boasting almost 400m users and a 35 per cent share of the market by customer numbers.
The deal gives Vodafone India an implied enterprise value of Rs828bn ($12.6bn), and Idea an enterprise value of Rs722bn. Vodafone will own 45.1 per cent of the new business while the Aditya Birla Group, Idea’s parent company, will own 26 per cent after paying Rs39bn cash for a 4.9 per cent stake.
Shares in Idea, which jumped almost 15 per cent on Monday morning, quickly reversed course to trade down 8 per cent as investors showed their displeasure with the deal’s terms.
Chris Lane, an analyst at Bernstein, said this reflected speculative investment based on anticipation that Vodafone would pay a large takeover premium, after the two companies confirmed in January that they were in talks on a possible merger.
The deal is a landmark in Vodafone’s rocky experience in India, which began with the £6bn ($7.4bn) acquisition in 2007 of a majority stake in Hutchison Essar — later acquired outright — amid a wave of foreign investment in the sector.
The company was hit five years later by a $2.5bn retrospective tax charge that remains the subject of international arbitration, and was surprised by the fierceness of price competition, leading to two writedowns totalling £6.6bn in 2010 and 2016.
The merger with Mumbai-listed Idea will offer Vodafone a means of securing a public listing for its Indian assets, for which it had long pondered an initial public offering.
Vodafone India said the merger would generate synergies of Rs670bn after integration costs and other payments. But while the scope for cost savings appeared large, this also came with risks for service quality, Mr Lane warned.
“There will certainly be disruption as they seek synergies, because they can only do so by firing people or removing network,” he said, estimating that the merged company would lose 3 to 5 percentage points of market share over the next two or three years. “I think both Jio and Bharti are licking their lips — this is a prime opportunity for them to take market share,” he said.
The merged entity will also face regulations requiring it to have no more than 50 per cent of revenue and subscribers, and holdings below specified limits, in each of India’s 22 telecoms circles. Analysts at CLSA estimate that the new company will fall foul of these rules in five circles, forcing them to shed clients and offload spectrum.
Kumar Mangalam Birla, chairman of the Aditya Birla Group, will remain as chairman of the new company, which is yet to be named. Vodafone will appoint the chief financial officer and the two companies will together choose the chief executive.
“The combined company will have the scale required to ensure sustainable consumer choice in a competitive market and to expand new technologies — such as mobile money services — that have the potential to transform daily life for every Indian,” said Vittorio Colao, chief executive of Vodafone.
The deal will enable Vodafone to move its Indian subsidiary off its balance sheet, reducing the British group’s net debt by Rs552bn.
Mr Birla said that the deal would be “highly accretive” for Idea shareholders. “Idea and Vodafone will together create a very valuable company given our complementary strengths,” he said.
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