Idea board approve Vodafone merger, will have 400mn customers collectively

The telecom industry in India had an interesting day as its 2nd and 3rd largest companies entered into a merger deal today. Forming a single entity which will take on Reliance Industries’ Jio and Bharti Airtel.

The Aditya-Birla owned telecommunication giant, Idea and Vodafone will jointly own 23 circles across the country and about 35% market share regarding customers.  The merger will benefit both the company as they will now have over 400 million customers and a revenue margin of over 41%. The vested entity of Vodafone, Vodafone India Mobile Services’ 45.1% shares will be with Vodafone, whereas, Idea Group will hold 26% of the group, the rest will be made available to the public.

Reacting to the news, shares of Idea went up 3.85% to Rs 111.75 a piece at 9.39am while the benchmark index Sensex fell 0.39% to 29,536.74 points.

Before completion of the transaction, 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 company. Vodafone will also explore strategic options for its 42% stake in Indus Towers; potential options include either a partial or a full disposal.

As per India Ratings, the merged entity will reduce its operational cost by eliminating the duplication of spectrum and infrastructure capex. The merger is also expected to improve the combined earnings of both companies due to cost savings, mainly on network and marketing expenses, according to a Fitch Rating report.

“For Idea shareholders and lenders who have supported us thus far, this transaction is highly accretive, and Idea and Vodafone will together create a very valuable company given our complementary strengths.” – Kumar Mangalam Birla, MD, Idea Cellulars Ltd.

Apart from the Vodafone-Idea merger, Bharti Airtel recently acquired Telenor and Reliance Communication joined forces with Aircel and is now in talks with Tata Teleservices as well.

There was little sense in either Vodafone or Idea exploring a merger with market leader Bharti since this would have violated M&A norms. A merger of either Vodafone or Idea with Bharti would have been possible only if the percentage of adjusted gross revenue market share of the merged entity did not exceed 50 percent in even a single telecom circle.

The guidelines also specify that the combined entity should have less than 50 percent of spectrum in each band individually in addition to having less than 25 percent of the spectrum allocated to all operators in all bands in all circles. These caps rendered the merger with Bharti impossible.

Post-merger market share for Tata Teleservices will be 6.5 percent, BSNL and MTNL combine at 5 percent, Aircel at 5.7 percent and Sistema at 4 percent. Reliance Communications (RComm) is estimated to be close to Sistema’s share at 4.2 percent.

Kumar Mangalam Birla, said, “This landmark combination will enable the Aditya Birla group to create a high-quality digital infrastructure that will transition the Indian population towards a digital lifestyle and make the government’s Digital India vision a reality. For Idea shareholders and lenders who have supported us thus far, this transaction is highly accretive, and Idea and Vodafone will together create a very valuable company given our complementary strengths.”

Birla gets an option to purchase shares from Vodafone at Rs 130 a share over the first three years and at market price in the fourth year. Kumar Mangalam Birla said this will be funded through promoter companies and not through listed entities such as Grasim and Hindalco.

Vodafone and Idea anticipate that completion will take place during the 2018 calendar year.