The Telegraph
Tuesday , March 21 , 2017
 
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'Merger of equals' builds telecom giant

- Vodafone and Idea unite to form new entity

Mumbai, March 20: The Vodafone group of the UK and Idea Cellular have agreed to merge their operations in India in a $23.2-billion deal, which will create the country's biggest telecom entity with a customer base of 396 million and a 40 per cent share of the revenues in the world's second-largest mobile telephony market after China.

The deal has been characterised as a "merger of equals" with joint control of the combined entity to be shared by Vodafone and the Aditya Birla Group under a shareholders' agreement.

The merger has been prompted by a wave of consolidation that has swept across the telecom industry after Mukesh Ambani-owned Reliance Jio sparked a brutal price war with its free services that have been extended till March-end next year under a membership scheme priced at a nominal Rs 99.

Jio's launch last September whipped up competition in an industry that works on wafer-thin profit margins, forcing Bharti Airtel, Vodafone and Idea to slash prices.

Under the terms of the deal, Vodafone will own 45.1 per cent of the combined company after transferring a stake of 4.9 per cent to the Aditya Birla Group for about Rs 3,900 crore (roughly $579 million) in cash concurrent with the completion of the merger.

The Aditya Birla Group will then own 26 per cent and have the right to an additional 9.5 per cent in order to equalise the shareholding of the two partners. The other shareholders, including the public, will hold 28.9 per cent.

"If Vodafone and the Aditya Birla Group's shareholdings in the combined company are not equal after four years, Vodafone will sell down shares in the combined company to equalise its shareholding to that of the Aditya Birla Group over the following five-year period," the companies said in a presentation.

Until equalisation is achieved, the voting rights of the additional shares held by Vodafone will be restricted and votes will be exercised jointly under the terms of the shareholders' agreement.

"The completion window (for closing the deal) is between 12 and 18 months," Vittorio Colao, Vodafone group chief executive officer, said in a conference call with analysts.

Analysts said the additional stake of 9.5 per cent will be sold at a price of Rs 130 a share to the Birlas, a considerable discount from the current valuation of Rs 160 a share.

Admitting that Vodafone was selling these shares at a discount, Colao told an analyst in the conference call: "It would be hard to see anybody paying for a 100 per cent of the synergies even before starting to get them. So, we think the value that we have indicated is a reasonable value."

The two companies, which announced in January that they were in talks, will have to shed spectrum in some areas to meet regulatory requirements. But Colao said it would be a very small part of the 1850MHz of spectrum that Vodafone India and Idea Cellular together hold.

Shares in Idea rose as much as 14.3 per cent immediately after the news but then fell 9 per cent as traders said the implied deal price for Idea was well below the stock's close on Friday. Vodafone shares were flat in London trading as of 9.42am GMT.

After the closure of the deal, the combined entity will have a board comprising 12 directors, with Vodafone and Idea appointing three directors each. The other six will be independent directors.

The Aditya Birla Group will have the sole right to appoint the chairman (as one of its three directors). It named Kumar Mangalam Birla as the chairman of the new entity.

Vodafone will have the sole right to appoint the chief financial officer. Both Vodafone and the Aditya Birla Group will jointly agree on the appointment of the chief executive officer and the chief operating officer.

Those roles - together with those of the broader management team - will be confirmed prior to closing with the appointments made on the principle of "the best person for the job".

Under the shareholders' agreement, the two sides will maintain a stake above 26 per cent until March 31, 2020, and thereafter above 21 per cent.

Idea said the rough deal price worked out to Rs 72.50 per share but stressed that was only for illustrative purposes and not the actual price. Idea's shares closed at Rs 108.10 on Friday.

Vodafone, which will cut its net debt by about $8.2 billion with the deal, has endured a tumultuous ride since it entered India in 2007, with a high-profile tax battle and a long-delayed Indian listing. India contributes more than 10 per cent of its revenues.

Colao said the pending tax case, arising from the Indian government's demand for $2 billion in taxes related to Vodafone's acquisition of a 67 per cent stake in the erstwhile Hutchison Max, would not affect the deal.

The deal does not include Vodafone's 42 per cent stake in Indus Towers, a joint venture between the British group, a unit of Bharti Airtel and Idea. But Vodafone and Idea said they would look to reduce their tower assets exposure, including selling their stakes in the joint venture.


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