Why Vodafone, Idea Cellular May Have To Infuse More Cash

Idea Cellular Ltd. and Vodafone Plc may be forced to infuse more cash to pare debt as their merger to create India's largest telecom operator has been delayed.

That's because they have to maintain their leverage low, one of the key conditions for the deal to go through, according to the terms they agreed to. The longer the delay in completing the merger, the lower the ratio. Earlier this year, Vodafone and Idea Cellular had infused more than Rs 14,000 crore in respective operations to pare debt.

The wireless carriers expected the final approval from the Department of Telecommunications by June 30. A pending payment related to previous one-time spectrum charges led to a delay, newswire PTI reported. The operators had in March last year agreed to merge as incumbent operators were caught in a bruising tariff war with upstart Reliance Jio Infocomm Ltd.

The merger agreement links the maximum leverage ratio of the merged entity on the time taken to complete the deal.

If the merger is completed by September end this year, the maximum net debt to last 12-month Ebitda could be only 6 times for the merged entity. To be sure, the conditions are not cast in stone and can be waived jointly by co-promoters.

The merged entity's net debt, adjusted for the two tower transactions, is expected to be around Rs 93,000 crore while the leverage ratio could be close to 6.8 times now, according to the data compiled by BloombergQuint.

It could rise as Reliance Jio continues to undercut rivals by offering cheaper plans in the world's second-largest telecom market. The tariff war has already hurt the operational performance of Vodafone India and Idea Cellular. Their earnings before interest, tax, depreciation and amortisation has fallen since Jio's launch in September 2016.

A delay in completing the merger would also push back realisation of merger synergies. The companies expected to save Rs 14,000 crore annually from the fourth year of completing the deal—60 percent from operational synergies and the rest from lower capital expenditure. An immediate benefit of close to Rs 2,000 crore is also expected primarily from rationalisation of overlapping sites.

The operational synergies were expected to boost the merged entity's operating income but now as its Ebitda has eroded, these synergies at best would help it return to a run rate it had at the time of announcing the deal, according to BloombergQuint's calculations.