The India telecom industry is seeing a paradigm shift ever since Reliance Industries Ltd commercially launched its telecom services R-Jio in September last year. R-Jio is the country’s largest 4G network and has provided free services to its users till March this year. It has disrupted the business model of industry veterans like Airtel, Vodafone, Idea, as well as the government-run BSNL. All these service providers have slashed their prices many folds to compete with Reliance Jio.

 It has also trigger for consolidation and listing of unlisted players, therefore, more options for retail investors for participation in growth story. The consolidation which announced post-Jio entrance in market are Reliance Communications and Aircel merger, Airtel acquiring Telenor and broadband service provider tikona, Vodafone acquired You Broadband Service Provider and now one more consolidation as below.

MERGER ANALYSIS

EQUAL PARTNERSHIP

Idea-Vodafone merger will be the biggest telecom merger post Reliance JIO launch in September 2016.
Idea promoters and Vodafone Group will be joint promoters of the combined entity and will have Equal affirmative rights to both promoters on key matters. On merger, Vodafone will be allotted 364.50 crores shares comprise of 50.3% stake for Equity value of approx. INR 27,600 crores.

However, the Aditya Birla group will acquire 4.9% stake of merged entity from Vodafone for consideration of INR 3900 crores (INR 109/- per share) therefore shareholding of Aditya group reaching to 26%.

Aditya Birla also has right to acquire up to 9.5% additional shareholding from Vodafone Group over a period of three years’ post-closure of deal for agreed price INR 130 per share. But this rights by Aditya group will be exercise based on growth achieved and market price of combined entity.

KEY MANAGEMENT

  • CEO & COO – Joint appointment
  • CFO – Vodafone to appoint

While idea and Vodafone will have joint control over the appointment of CEO and COO, the exclusive rights to appoint CFO is with Vodafone. So Vodafone is not just major shareholders but also have more financial rights.

BOARD COMPOSITION

  • 12-member board with 6 independent directors
  • Equal representation from Aditya Birla Group and Vodafone Group
  • Chairman: Mr. Kumar Mangalam Birla

Since the board is represented by both the group equally but the chairman has been decided from Aditya Group and but there is no clarity on casting vote.

SHAREHOLDING EQUALISATION

  • As Discussed Aditya Birla Group has the right to acquire up to 9.5% additional shareholding from Vodafone Group.
    Vodafone will not just be a major shareholder but shall also have more financial rights.
  • If Birla do not increase stake in four years’ post completion of the deal. Vodafone also has the option to equalise the stake over next 5 years.
  • If equalization is not achieved, Vodafone Group to sell excess stake till equalisation, voting on excess stake held by Vodafone to be restricted and exercised jointly as per the agreement.

CONSOLIDATION POSITION & EXPANSION POST CONSOLIDATION

  • Creating India’s largest telecommunications company
  • Combined Subscriber base of nearly 400 million
  • Combined Revenue Market Share of 40.7% and Customer Market Share of 35.1%.
  • Leadership position (#1 / #2 rank) in 21 (out of 22) telecom circles
  • Largest existing Mobile Voice population coverage of 1.1bn Indians
  • Pan India Broadband currently covering 650mn Indians; committed to reach 1.1bn
  • Deepest Pan India GSM network infrastructure of 273,000 GSM sites
  • Rapidly expanding existing Mobile Broadband network spread of over 189,000 sites
  • Release of overlapping equipment for expansion of mobile broadband services to uncovered geographies
  • Spectrum:
    • Substantial overall spectrum holding of 1,850 MHz1 across multiple bands
    • Auction acquired liberalised spectrum quantum of 1,645 MHz
    • Large broadband (3G/4G) spectrum portfolio of 1,429 MHz
    • Premium 900 MHz band in 17 circles
  • HIGHEST BROADBAND CAPACITY
    • 163 mobile broadband carriers – highest amongst all operators
    • 3G – Pan India 344 carriers with 2 carriers in 11 leadership telecom markets
    • 4G -Pan India 1294 carriers & capability to offer up to 250 Mbps in 12 markets
    • Large fibre network of approximately 2,50,000kms
    • Ability to build large broadband capacity on existing spectrum
  • EXTENSIVE DISTRIBUTION CHANNEL
    • Widest pre-paid reach through over 2 mn retailers
    • Post-paid reach to Enterprise & Retail through 30,000 ‘Field Sales Team’
    • Brand strategy will be developed in due course and will leverage customers’ affinity for both existing brands, built up over the past decade
  • PAYMENT BANKS:
    • Idea Money, M-pesa, and Aditya Birla Payment Bank:
      Launch of Payments Bank services, with power of domain expertise. Canvas of 400mn customers and global expertise of M-pesa available for Digital Wallets.Please Note: The final merged entity will hold one payment bank license (including digital wallets) as per present guidelines. The exact structure and shareholding in this is under discussion and will be announced separately.
  • FIXED LINE OFFERINGS:
    • Expansion of Fixed line offerings – Enterprise Wireline, ILL, MPLS, etc.
    • Introduction of latest broadband solutions such as FTTH, Wi-Fi, etc.
    • Deeper penetration in Enterprise Segment across MNC, Large & SME clients

SIGNIFICANT SYNERGIES

  • Rationalisation of operating expenses including Network Infrastructure & IT Services. Channel & Service partner, brand efficiencies, etc.
  • Reduced Network capex due to redeployment of overlapping equipment, de-duplication of fresh equipment & spectrum consolidation
  • Estimated NPV of net synergies of approximately INR 670 bn (NPV of cost and capex synergies post integration costs and spectrum liberalisation fees). Annual synergy run-rate of INR 140bn (60% operating expenditure) by the 4th year of full operations.

FINANCIAL CONSOLIDATION

Particulars IDEA VODAFONE Combined Idea & Vodafone
Revenues 369 447 816
EBITDA 114 130 244
EBITDA (Margin) (%age) 30.89% 29.08% 30%
Net Debt 527 552 1,079
Net Debt/EBITDA 4.62 4.25 4.42
Capex 75 79 154
Total Spectrum investment 617 788 1,405

Please Note: The combined entity will be able to monetise from the Tower sale, 11.5% Stake sale of Indus Towers and synergy benefits of the fourth year which will help the company reduced Net Debt/EBITDA to 3. Whereas the Vodafone also hold 42% stake in Indus Towers which is excluded from the transaction perimeter.

Leading Indian Mobile Operator

Particulars IDEA-VODAFONE AIRTEL TELENOR JIO
Subs (mn) 395 320 72
Revenue Market Share (Q3FY17) 40.70% 34.30% 0.30%
Customer Market Share (Q3FY17) 35.10% 28.40% 6.40%
Optical Fibre Cable (‘000s KM) 250 224 250
Broadband spectrum (MHz) 1,429 1,140 1,235

TAX DISPUTE

The ongoing tax dispute will not affect the Vodafone-Idea merger.

Separate Brand Name and Operation

Till the merger is completed, Vodafone and Idea will be operating separately and post-consolidation they might use both Brand Name.

Market Movement

Since the announcement of the deal on 20th March 2017, there is fall in the market price of IDEA Cellular approx. 10-15%. It seems that the public shareholders of Idea Cellular are not Happy with the valuation

Valuation

Till the merger is completed, Vodafone and Idea will be operating separately and post-consolidation they might use both Brand Name atleast few years till complete migration of customers happens.
The transaction values Vodafone at Rs. 82,800 crore (EV) and Idea at Rs. 72,200 crore (EV) debt of Rs. 55,200 and Rs. 52,700 crores respectively. The ideas has been valued much lower the current market price and which is also reflected with fall in the price of Idea Cellular post announcement. Vodafone higher valuation is supported with higher revenue, customer base and total spectrum holding as compared with IDEA.

Whereas Airtel which is diversified in additional services and presence in South Asia and Africa has market cap. is Rs. 1,36,570/- crores and debt of Rs. 96,078/- crores.

The Deal of Vodafone and idea has been valued fairly and to note that the Aditya group has committed a fixed Price of Rs. 109 per share to acquire 4.9 % stake on completion of merger (2018) From Vodafone Group. And, Option to acquire 9.5 % stake for Rs. 130 per share in the period of 4 years to bring stake to equal.

Shareholding Changes

Particulars IDEA IDEA_VODAFONE_Post merger Post Aditya Group Acquisition on merger from Vodafone Post Aditya Total Acquisition from Vodafone
Promoters IDEA 42.45% 21.10% 26.00% 35.50%
Promoters Vodafone 50.30% 45.40% 35.90%
Public 57.55% 28.60% 28.60% 28.60%
Total 100.00% 100.0% 100.00% 100.00%

CONCLUSION

The merger between Idea and Vodafone will make them a leading player. As per management synergies benefits to arise is INR 670bn for cost and capex. & 140bn operating expenses by the 4th year. It will also bring debt with sale of Towers Assets in the combined entity.

The idea for merger seems cost savings and asset monetisation opportunities aiding financial performance. And whether the company will be able to monetise the surplus spectrum must be seen.

The promoters of Aditya group have smartly consolidated with Vodafone in this pricing war at the same time have rights to equalise the stake in stages. As of now, there is no gain to the public shareholders and hope that they will be benefited with the merger in the long term.

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