Vodafone India, Idea Cellular Get Final Approval For Merger

Vodafone India and Idea Cellular Ltd. have received the approval from the National Company Law Tribunal—the last regulatory nod—for the merger of the two entities to form India's largest telecom service provider, “Vodafone Idea Ltd.”

“Both Vodafone and Idea brands, which have strong consumer affinity across metro, urban, rural and deep interior markets, will continue to operate”, the companies said in a joint press release today.

The deal was first announced by the companies on March 20 last year. The two operators had agreed to combine as they were losing ground in a competitive telecom market disrupted by Mukesh Ambani-led Reliance Jio Infocomm Ltd.'s cheap data.

Shareholding Pattern

Aditya Birla Group, the promoter of Idea Cellular, will own 26.1 percent after purchasing additional 4.8 percent stake from Vodafone Plc., while the public shareholders of erstwhile Idea Cellular will own 28.7 percent stake in the merged entity. Vodafone Plc. will hold 45.2 percent stake in the company with an option to sell 0.2 percent of its stake in the open market.

Vodafone has the right to sell its shares first to Kumar Mangalam Birla-promoted companies and then in the open market to bring down its shareholding to the level of Idea Cellular's promoters.

The deal excludes Vodafone's 42 percent stake in Indus Towers but includes Idea Cellular's 11.15 percent holding in India's largest telecom infrastructure provider. Idea Cellular is expected to receive close to Rs 5,100 crore for its stake in Indus Towers, while Vodafone will continue to hold its shares.

Board's Composition And New Management

Kumar Mangalam Birla will now head the merged company as the non-executive chairman of a 12-member board. Balesh Sharma, originally the chief operating officer of Vodafone India, has been appointed as the chief executive officer of the new entity. Akshaya Moondra, the former chief financial officer at Idea, will take over the same role at Vodafone Idea.

Financials

The combined entity had a revenue of nearly Rs 58,675 crore for the last 12-months ended June 30 and an operating margin of close to 20 percent. It's expected to have a net debt of more than Rs 1 lakh crore, while the leverage ratio (net debt-to-Ebitda) is expected to be close to 9 times, according to data compiled by BloombergQuint.

Peer Comparison

Vodafone Idea now has the highest revenue market share with a customer base of more than 44 crore. It will be the No. 1 operator in nine out of the 22 circles in India, and either No. 2 or 3 in the rest.

The merger is expected to generate Rs 14,000 crore annually in synergies, including operational expenditure synergies of Rs 8,400 crore. This equates to a net present value of approximately Rs 70,000 crore, the statement said.

The merged company would not require incremental external cash, it added. Synergy benefit, longer tenure for deferred spectrum liability and market repair will take care of all cash requirements.

Challenges

Vodafone Idea will have to bring down its revenue market share and subscriber base below 50 percent in any particular circle within a period of one year, according to merger and acquisition guidelines.

The combined entity's revenue market share exceeds 50 percent market in Kerala, Maharashtra and Gujarat, while subscriber market share exceeds the half-way mark in Gujarat, Haryana, Kerala, Madhya Pradesh and Uttar Pradesh (West).

The entity's leverage too needs to be at a certain limit depending on when the merger is completed, according to their agreement. Currently the merged entity's net debt is more than Rs 1,00,000 crore, while the leverage ratio exceeds the ascertain limit.