The Vodafone UK group posted a whopping loss of 5.5 billion euros last year mainly on account of its investments in the telecom business in China and India going sour. It's Indian operating arm till recently was toying with the idea of going it alone and in fact going public with an IPO. But the advent of Reliance Jio fluttered the dovecots of the entire Indian telecom industry. Vodafone changed tack and dropped the idea of going it alone on the back of IPO and instead embraced Idea Cellular. In a way the global giant, which was frightened out of its wits by a desi company Reliance, has found solace in another desi company Idea Cellular. And how?
Well the shareholders’ agreement between Vodafone and Aditya Vikram Birla (AVB) group, the promoters of Idea Cellular, seems to have been carefully crafted in favor of Vodafone. Heads I win, tails you lose is what Vodafone is telling AVB. Indeed, Vodafone has stooped to conquer. It has agreed to obliterate its identity as a corporate entity in India by merging itself with Idea Cellular but in the same breadth it has asserted its right to continue in the marketplace which is what the simultaneous marketing of the combined entity’s wares under two brand names Vodafone and Idea means.
Indeed it is more important to remain in the memories of customers rather than in the memories of financiers. It is true that Idea is a brand name that resonates and strikes a chord in the rural and semi-urban markets whereas Vodafone appeals to city slickers. It would be interesting to know if the division of the turfs under the secretive shareholders’ agreement condemns Idea to remain in the rural backwaters.
Market watchers aver that the market’s disillusionment with the deal in so far as Idea and AVB are concerned was due to the clause that permits Vodafone to sell 9.5 percent stake to AVB at a predetermined price of Rs 130 each over a period of three years. Vodafone will own 45.1 percent of the combined company and the Aditya Birla Group 26 percent to start with. 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" says media reports. The dice indeed is loaded heavily in favor of Vodafone. AVB and Idea willy-nilly may have to acquire greater stakes lest they lose in the boardroom and general meetings sweepstakes.
The cap on voting rights of Vodafone is as under the shareholders’ agreement effectively only for four years because if there is no parity in the voting rights by four years, Vodafone will sell in order to come down to the AVB level. And this stooping is also to conquer because AVB would prefer to buyout Vodafone lest it is relegated to a subordinate role in the combined entity.
Kumar Mangalam Birla will be the Chairman of the merged entity, while the post of CEO and COO will be decided jointly. Vodafone will get to pick the CFO, says a Business Line story on the subject. For Kumar Mangalam Birla the honor of being the chairman may be considerably neutralised by CEO and CFO doing the bidding of Vodafone. Vodafone indeed seems to have deferred to Idea Cellular but only enough to massage its ego. It has by no means faded away but chosen to ride piggyback on a more market savvy Indian partner.
Lastly, AVB and Idea may have to share the bitter harvest of Vodafone’s income tax legacy also facing as the latter does a tax demand of close to Rs 20,000 crore with the income tax department digging itself in. Merger does not mean absolution from this liability. What it portends grimly for Idea shareholders is the liability would devolve on the combined entity.
Indeed, the knock-out punch delivered by Reliance Jio, the first desi, has had the effect of the foreign company holding the second desi company in a bear hug.
Updated Date: Mar 22, 2017 15:18 PM