Idea-Vodafone to be biggest telco in India: Will the merger benefit rivals on spectrum front?
The combined entity may be forced to sell the spectrum at a discount, benefiting the rivals
In one of the biggest mergers in the telecom space, Vodafone India and Aditya Birla Group-promoted Idea Cellular on Monday announced the much-awaited amalgamation, signalling a consolidation in the debt-ridden and fiercely competitive telecom sector.
The move comes after Reliance Jio, owned by Reliance Industries, launched its commercial operations heightening the competitive intensity in the sector.
The merger had been much speculated upon as the companies had earlier said they were in talks to merge operations in order to deal better with the evolving situation in the sector.
Here are the key facts you need to know about the deal:
What are the finer details of the deal?
Idea Cellular will merge Vodafone India Ltd (VIL) and its wholly owned subsidiary Vodafone Mobile Service Limited (VMSL) with itself.
Vodafone will own 45.1 percent of the combined company and the Aditya Birla Group 26 percent. Idea has the right to acquire more stake in the combined entity "from Vodafone under an agreed mechanism with a view to equalising the shareholdings over time".
If Vodafone and the Aditya Birla Group's shareholdings in the combined company are not equal after four years, Vodafone will sell shares in the combined company to equalise its shareholding to that of the Aditya Birla Group over the following five-year period.
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.
Vodafone will transfer a stake of 4.9 percent to the Aditya Birla group for Rs 3,900 crore in cash concurrent with completion of the merger.
"Upon the amalgamation becoming effective, the entire business of VIL and VMSL, excluding VIL's investment in Indus Towers Limited, its international network assets and information technology platforms, will vest in the company," said Idea's filing to the exchanges.
The transaction is expected to close during calendar year 2018, subject to customary approvals from concerned authorities, including SEBI, Department of Telecom and RBI.
The merger will result in substantial cost and capex synergies with an estimated net present value of approximately $10 billion after integration costs and spectrum liberalisation payments, with estimated run-rate savings of $2.1 billion on an annual basis by the fourth full year post completion.
Vodafone India will be deconsolidated by Vodafone on announcement and reported as a joint venture post-closing, reducing Vodafone Group's net debt by approximately $8.2 billion.
What are the key numbers?
It will indeed create the largest telecom firm in the country with a revenue market share of 40 percent and a subscriber base of 395 million. The merged entity will have a customer base of over 394 million.
The turnover of Vodafone India is Rs 5,025 crore and of Vodafone Mobile Services is Rs 40,378 crore. Idea Cellular's turnover is Rs 36,000 crore. The net worth of VIL is Rs 12,855 crore, VMSL Rs 3,737 crore and that of Idea Cellular Rs 24,296 crore.
Vodafone's market share was 18.16 percent with 204.68 million mobile customers and that of Idea was 16.9 percent with 190.51 million at the end of December 2016, as per the TRAI data.
At present, Airtel with a market share of 23.58 percent and a customer base of 265.85 million is the country's largest telecom player.
The implied enterprise value is Rs 82,800 crore ($12.4 billion) for Vodafone India and Rs 72,200 crore ($10.8 billion) for Idea.
What are the key regulatory hurdles for the combined entity?
Given the present spectrum holding, revenue and subscriber base, both the companies need to work on synergy to comply with rules.
According to the merger and acquisition rules, an entity should not hold more than 25 percent spectrum allocated in a telecom circle and 50 percent of spectrum allocated in a particular band in a service area.
The merged entity should also not have more than 50 percent revenue and subscriber market share.
As per CLSA report, the merged entity would breach revenue market share, subscriber and spectrum caps in five markets.
The combined entity as per present scenario will breach spectrum cap in 900 Mhz band in Maharashtra, Gujarat, Kerala, Haryana and UP West and in 2500 Mhz band in Maharashtra and
Gujarat, it said.
CLSA estimated that the excess spectrum which would need to be surrendered or sold off is valued around Rs 5,400 crore and for the merger, both the companies will also have to shell out Rs 5,700 crore for liberalising radiowaves that they were allocated administratively.
What are the companies saying?
"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 strength," said Kumar Mangalam Birla, Chairman, Aditya Birla Group.
Meanwhile, Vittorio Colao, Chief Executive, Vodafone Group Plc, said: "The combination of Vodafone India and Idea will create a new champion of Digital India founded with a long-term commitment and vision to bring world-class 4G networks to villages, towns and cities across India."
"The combined company will have the scale required to ensue sustainable consumer choice in a competitive market and to expand new technologies - such as mobile money services - that have the potential to transform daily life of every Indian."
What are the experts saying?
Most of the sector observers are welcoming the consolidation in the sector but are still watchful.
Nitin Soni of Fitch Ratings told ETNow that the consolidation is positive in the long-term. "We will now have three big players with Jio, Vodafone-Idea and Bharti Airtel. The fourth is the RComm-Aircel and probably Tata combine," he said.
However, he has a negative outlook on the sector in the short-term as he sees serious competition continuing and the rise in capex in the market pressuring the operators.
Neelkanth Mishra of Credit Suisse told CNBC-TV18 that he too continues to stay cautious on the telecom sector. However, he expects pricing power to return in the telecom sector as market share settles.
However, the merger may also be beneficial for the rivals on the spectrum front. According to an earlier report in BloombergQuint, it is likely to force Vodafone-Idea to sell overlapping spectrum cheap to their rivals.
The report citing a Credit Suisse report has said that the combined entity may have to shed radio waves worth Rs 6,000 crore. "The two carriers would probably sell the spectrum at a lower price than originally purchased," the report said citing the report by Sunil Tirumalai and Viral Shah. This will be of benefit to Bharti Airtel and others as they will get the much-needed spectrum at a discounted price.
With inputs from PTI and IANS
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