Promoters To Invest $2 Billion In Idea, Vodafone To Save Merger

Vodafone Plc and privately held promoter group entities of Idea Cellular Ltd. will together infuse close to Rs 14,140 crore in their respective telecom operations to pare debt for the merger to go through.

Idea Cellular Ltd., promoted by Aditya Birla Group, plans to infuse Rs 6,750 crore in two tranches: investment arms of Kumar Mangalam Birla will subscribe to preferential shares worth Rs 3,250 crore and the company would raise another Rs 3,500 crore via share sale, it said in an exchange filing. Vodafone Plc., in a separate release to the London Stock Exchange, said that it will need to infuse close to Rs 7,390 crore in its Indian arm to pare the remaining debt.

Why This Fund Raising?

Vodafone Plc. and Idea Cellular will use the fund infusion to pare debt to meet one of the key conditions of the merger: keep debt below 6.25 times the operating income of the merged entity. Given the financials of the two companies for 12 months ended September, it works out to 6.9 times the Ebitda.

Vodafone India, according to the agreement, will contribute an equal amount of debt to the merged entity that Idea Cellular brings in, and an additional Rs 2,476 crore. After the planned infusion of Rs 6,750 crore, the burden on Aditya Birla Group company's books will be a little over Rs 50,000 crore. Which means Vodafone can only bring in Rs 52,483 crore debt into the merged entity, requiring the company to reduce the excess debt worth Rs 7,390 crore.

Brokerage JM Financial in its report released before Idea Cellular's announcement said that the fund-raising proposal appears to be driven by merger conditions, and not so much by immediate cash crunch or any covenant breach.

Edelweiss Securities agreed. It's been necessitated by the Vodafone merger pact limiting peak leverage, it said in a report. The brokerage expects the company to use the proceeds primarily to prune leverage.

Vodafone Plc. will also sell close to 2.5 percent stake to the promoters of Idea Cellular for Rs 1,960 crore, according to the revised terms of the agreement. As per the terms agreed in March 2016, Vodafone Plc would have got 50 percent stake in the merged entity and the U.K.-based based telecom major was required to sell 4.9 percent after the merger to Idea Cellular promoters.

Headwinds

Reliance Jio Infocomm Ltd. has triggered a tariff war in the world's second-largest telecom market. That's hurt revenues of its older rivals like Vodafone India and Idea Cellular.

The two operators also face pressure on earnings because of the 57 percent cut in interconnection usage charges levied for cross-network calls. That could bring down the operating income of both the companies, worsening their leverage ratio.

Edelweiss expects Idea Cellular's debt to increase in second half of the year ending March as its Ebitda falls due to the IUC reduction and sustained competition.

Changes To Shareholding Pattern

The shareholding pattern of the merged entity changes as Vodafone Plc. ends up owning more stake then decided earlier, which they can sell in the open market. Minority shareholders or the public shareholders of Idea Cellular get less stake in the merged entity which has less debt. Vodafone Plc would have to sell another 2.1 percent in the merged entity in the open market.