Price war triggers consolidation, Idea Vodafone announces merger
Published: Mar 21, 2017
By TIOLCORP News Service
NEW DELHI, MAR 21, 2017: FACING intense competition from cash-rich Reliance Jio, the Aditya Birla Group and British telecom giant Vodafone Plc on Monday announced the merger of their Indian wireless telephony businesses, creating the largest telecom operator in the country.
In a news conference in Mumbai, Vodafone Group Plc Chief Executive Officer (CEO) Vittorio Colao and Aditya Birla Group Chairman Kumar Mangalam Birla said the merger would create a new champion of digital India. It would launch new services soon.
As the first step of the merger, Birla-owned Idea Cellular and Vodafone India would merge their operations at a swap ratio of 1:1. Then, Birla's holding companies would buy a 4.9 per cent stake from Vodafone at Rs 110 per share, investing close to Rs 3,900 crore. This will increase Idea's stake to 26 per cent and bring down Vodafone Plc's stake to 45.1 per cent. The Birlas would have the right to acquire another 9.5 per cent stake from Vodafone in the next four years, so that both partners eventually hold an equal stake in the company (about 35.5 per cent each).
Till the Birlas buy the additional shares, Vodafone Plc would have restricted voting rights on these shares.
At present, Vodafone and Idea together have a customer base of 400 million.
Their joint revenue share is likely be 41 per cent, after the merger is complete at the end of 2018. Bharti Airtel, which used to be the biggest market player till now, will be a distant second, with 268 million customers in India. Revenue-wise, too, Airtel would be on the second spot with a market share of 35.6 per cent, along with Telenor. Airtel and Telenor are planning to merge their operations.
The importance of spectrum ownership cannot be denied. The entity formed by the merger of Vodafone and Idea would have 1,850 MHz; Bharti has 1,489 MHz and disruptive entrant, Jio, has 1,169 MHz.
According to the agreement between Vodafone and Idea, the implied enterprise value for Vodafone is Rs 82,800 crore. Idea Cellular's value is Rs 72,200 crore, excluding its 11.2 per cent stake in Indus Towers. The merger ratio of 1:1 was based on Idea's undisturbed share price of Rs 72.5, based on the 30-trading day average price as on January 27, when Vodafone and Idea first confirmed they were contemplating a merger. Since then, Idea's stock had shot up on speculation that it would fetch a far higher valuation.
On the management of the merged entity, Birla said he would chair the board of the company. It would have six independent directors and three directors (including the chairman) from each promoter.
The CEO and chief operating officer of the merged entity would be decided jointly at a later date, though the chief financial officer would be appointed by Vodafone. The brand names of both Idea and Vodafone would be retained.
The merged entity would save an estimated $2.1 billion a year on operating costs and capital investments after four years. Asked whether or not the merger would result in lay-offs, Birla said the new company would create more opportunities for both companies and there will not be any job cuts.
