The swift way in which the Idea-Vodafone merger is progressing under a year shows the improvement in ease of doing business in India.” That was Vittorio Colao at the World Economic Forum (WEF) governors’ meeting in Davos earlier this year. Though a vocal critic of the labyrinthian regulations and bureaucracy of the world’s largest democracy, the chief executive of Vodafone Group Plc was seemingly delighted about the record speed of regulatory approvals that were coming along after Vodafone and Idea decide to join forces in March 2017. The June 2018 deadline to consummate the union and create the world’s secondlargest telecom giant looked plausible.
And then the call dropped. Suddenly, chances of the whole thing getting tripped up or entangled in legalities became very real, and that meant a hit on $10 billion worth of synergies. By mid-June, the tide had turned for the worse. The Department of Telecom (DoT) surprised all by seeking a second round of legal opinion from the Assistant Solicitor General (ASG) on the demand for dues — always a contentious issue as most demands such as licence fee, spectrum usage charges and one-time spectrum charge (OTSC) had been stayed by courts. According to current mergers and acquisitions (M&A) regulations, only OTSC needed to be paid up.
In his first opinion, the ASG had said the merger of Vodafone’s six subsidiaries with Vodafone Mobile Services (VMSL) in 2014-15 must be completed and balance OTSC paid. But then DoT sought to clarify if demands related to the merger of six units with VMSL are also to be raised, along with those related to the present merger between Idea and Vodafone. Divergent views also emerged within the department on the mode of seeking dues. One side argued that all dues on VMSL must be sought in cash, while the other said it could be a combination of cash and bank guarantees.
Even though DoT needed to showcase the ‘ease of business’ mantra that the government is trying to live by, it didn’t want any post facto finger-pointing or controversies from vigilance or other agencies. Thus, it decided to proceed with extreme caution. The matter was also very delicate inasmuch as the merger was the first 100% FDI proposal, into Idea Cellular, to come up directly for departmental clearance after scrapping of the Foreign Investment Promotion Board (FIPB).
“No one wanted to take any decision in haste or give any leeway because 10 years later, no one wants to have a legal case on their hands alleging any wrongdoing,” says an official who was dealing with the issue at that time. Another point of clarification was the date from which bank guarantees for OTSC be sought from Idea on airwaves beyond 4.4 MHz in 11 circles, say sources. OTSC dues are based on DoT rules that require a telco holding more than 6.2 MHz in a circle between July 2008 and December 31, 2012, to pay a marketlinked price for the excess spectrum held.
Likewise, the telcos may be told to pay the market price for airwave holdings beyond 4.4 MHz per circle between January 2013 and the expiry of their respective licences. DoT had first raised a claim for more than Rs 8,100 crore, including OTSC, of which VMSL paid Rs 2,450 crore. The balance remained as the case was pending in the telecom tribunal. Finally, the telecom department asked the operators to pay more than Rs 7,200 crore as dues. Both telcos asked for recalculation as they felt the final numbers should be lower than what was being asked. “We were comfortable at that point. But surprise is the only constant in the way the Indian government works…” quips a senior executive at one of the two companies on condition of anonymity.
DOT THE Is, CROSS THE Ts
And from then on, it became a day-to-day affair. Executives of both sides spent hours daily in the corridors of power, tracking the movements of the file on a nearly hourly basis — from the junior levels to the secretary’s office and then to the minister. As days began to pass, the profile of company visitors to DoT went up several notches. Kumar Mangalam Birla, chairman of the Aditya Birla Group, met senior DoT officials twice in the first nine months since announcing his telecom company’s merger with global operator Vodafone India at the end of March 2017.
But then, as the tag of the fastest and smoothest M&A deal in India Inc started to lose shine, the frequency of meetings increased. Birla, in fact, has met DoT officials thrice in the past three months. Colao has also travelled from London to India twice to meet the telecom secretary and telecom minister Manoj Sinha to ensure there was no slip between the cup and the lip. On his second visit, soon after a conditional approval was granted, he was accompanied by Vodafone Group chief financial officer Nick Read, who will soon replace Colao.
In the lead-up to the merger, Vodafone had also sent its group shared services chairman Ravinder Takkar, besides outgoing Vodafone India managing director Sunil Sood, into the arena to move things along. Idea Cellular managing director Himanshu Kapania too joined in. Even the Prime Minister’s Office was approached by the merging telcos, according to some company officials. Timelines were critical. The Indian telecom units of UK’s Vodafone Group Plc and the diversified Aditya Birla Group were desperate to complete the merger. They were losing Rs 200 crore a day and the delay had held up critical unlocking of an estimated $10 billion of cost and capital expenditure synergies that the combined entity needs to stay competitive on the 4G front, where Reliance Jio Infocomm and Bharti Airtel have taken the lead.
Such was the desperation that India’s number 2 telco, Vodafone, and third-ranked Idea paid up over Rs 7,200 crore dues as OTSC and market fees for nonauctioned airwaves, just as demanded by DoT, though under protest, saying “any further delay for according the approval of Vodafone licences and Idea would permanently impair the merged entity.” This came, even as Vodafone India’s first quarter service revenue slumped 31% on-year. Idea’s operations, too, are weak amid sustained tariff pressures and without a one-time gain from the sale of its tower arm, the carrier would have suffered a Rs 2,757.6 crore loss (before tax and exceptional items) in the first quarter. Although everyone factors in end-moment hiccups in such a large transaction, the Idea-Vodafone deal was a very tight call indeed till last week.
ALL IN A DAY’S WORK
A few days after the deal was given final approval on July 26, a visibly-relieved telecom secretary Aruna Sundararajan said, “It has been quite a cliffhanger for us and there were many occasions when there were uncertainties.” The more the delay, the louder became the whispers of a conspiracy by rivals. “Of course, some forces were at play, but that is the name of the game,” alleges another official, hinting at corporate shadowboxing that has always polarised the hyper-competitive sector.
Though these allegations can’t be independently confirmed, they added greatly to the intrigue behind last minute deferments amid discussions. “We had intense negotiations. At times, they were in the next room discussing and at times, we took a step without knowing what they would do. All sides would go back to their consultants, legal experts and come back with something else that presented a new scenario,” says Sundararajan.
A senior executive at one of merging telcos estimates 20-25 meetings in the last month alone. “What do you do? We could, at best, push. But we know the way India works,” shrugs another company official. “The companies may have factored in some delays but there was definitely an air of agitation when we interacted with the executives,” says a consultant who was involved in the integration process.
Well-heeled executives from Idea Cellular and Vodafone India usually have that cursory meeting or two with the telecom department in a year. But it became a regular trek after India’s number 2 and 3 telcos announced plans to create India’s largest M&A deal. In the past two months, of course, it has transformed to frantic pacing as corporate crowds — including the top management — tried to coax officials into granting speedy approvals. “Isn’t it ironic that when the government is talking about ease of doing business, we have visited the telecom ministry and other regulatory bodies more now than in a few years put together?” asks an executive, who has been among those visiting DoT more often than he would have liked.
ALMOST TOGETHER
Today, a week after approvals are in, all sides agree that crafting the largest merger of India Inc has had unique challenges. While Sundararajan accepts there is “circularity in the process,” she adds that the department’s duty is to “safeguard government interests when these assets change hands” and compliance was adhered to. But, according to executives in these two telcos, the bureaucratic red tape cost them money and subscribers, while affecting their shareholders too.
Now, only a cursory clearance from the National Company Law Tribunal is needed to form India’s largest telco, Vodafone Idea Ltd, pipping Bharti Airtel, with some 408 million subscribers and around 37% revenue market share. It will have over Rs 60,000 crore in revenue but, worryingly, also some Rs 1,25,000 crore in debt. Still, the duo will be much better off united in the fight for subscribers against Jio and Airtel. After 16 months, the alliance looks cemented. And although Birla recently said the new entity is on an “exciting journey,” some say negotiations may still be on.
“We will still wait for DoT to respond to our presentation, where we have told them of our estimates and calculations. Basis what they say, we will decide whether to move court or not. But we have kept that option open despite paying up (dues),” says one of the people in the know. Possibly the biggest gain from the merger has been the creation of a template. “Overall, there is clarity and this will help for
future mergers,” says Sundararajan. Analysts, though, estimate tough times ahead for Vodafone Idea, with troubles accentuated due to the delay. It will now have to beat those who edged ahead.
Bank of America-Merrill Lynch, in its July report, says the merged entity would be vulnerable to market share losses, given that both Jio and Airtel are ahead of Vodafone/Idea in data investment, and will likely take away customers. While the duo has embarked on severe efforts to tone down all
flab, a Credit Suisse report says despite “sharp cost cuts, we do not see annual Ebitda for the merged company crossing Rs 16,000 crore for the next three years.” It was an Idea whose time had indeed come. Perhaps sooner than it is actually happening.
