This article is written by Aditya Kasiraman who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from LawSikho.

Introduction

On March 20, 2017, India’s third-largest telecommunications company, Idea Cellular (Idea), announced US $ 23 billion, to merge with the world’s second-largest company, Vodafone India Limited (Vodafone), to build India’s most lucrative company estimated at US $ 12.5 billion. 

The company will have a subscription base of 394 million and a customer market share of 35% and 41% respectively. As the merger is expected to take 24 months to complete, both companies have agreed to operate as separate companies until then. Together, Kumar Mangalam Birla, Chairman of Aditya Birla Group said, “Idea and Vodafone will build a very important company when we look at our mutual power.” The merger of fierce competitors in the Indian telecommunications industry came after India’s largest company Reliance Industries Limited, owned by Mukesh Ambani, launched Reliance Jio Infocomm Limited (Jio) in September 2016. Jio came up with prices, offering free voice and the lowest prices in the world. It has disrupted the telecommunications industry in the country where telecom operators receive 70% of their revenue through voice telephony.

This article discusses a merger between the third-largest telecommunications company at Idea Cellular (Idea) and the world’s second-largest company, Vodafone India Limited (Vodafone). The agreement announced in March 2017 was estimated at about US $ 23 billion. The merger came after an unprecedented change made by the Indian telecom landscape following the launch of Reliance Jio Infocomm Limited (Jio) in September 2016. Leading players in the industry, who were already facing financial challenges due to high infrastructure costs and huge debt, faced many problems with Jio’s customer migration. 

To deal with Jio’s attacks, the operators went into the integration mode, discovering the spectrum, minors, infrastructure, etc. With Jio growing exponentially during the day with offers such as free mobile authorities, and another competition in Airtel at mergers and acquisitions, Idea-Vodafone faces a tough road ahead. It remains to be seen whether the largest merger in India’s mobile history will be the game changer in the world’s second largest telecommunications market.

India’s Telecom Sector

India’s telecommunications sector is divided into three categories – wireless services, telephone lines, and the Internet, a sector that contains services provided by public and private organizations. The main public sector organizations were Mahanagar Telephone Nigam Limited (MTNL) and Bharat Sanchar Nigam Limited (BSNL), while the leading private sector organization was Bharti Airtel Limited (Airtel).

In India, wireless communication through pagers was introduced in 1995. This provided much-needed mobility in communication processes. Motorola has been a leading player in pager services with 80% of market share. The pager services business reached 2 million subscribers in 1998 (later reduced to 500,000 subscribers in 2002).

Service Provider Saga

India’s telecommunications market is expected to grow by 10.3% annually to reach US $ 103.9 billion by 2020. Revenue from the Indian telecommunications sector was US $ 41.68 billion in 2015. The top six players in the Indian wireless service market in 2016 were Airtel, Vodafone, Idea, Aircel, RCom, and BSNL. In the wireless segment, Airtel was the market leader with a share of 24.31% according to full subscriptions followed by Vodafone with a share of 19.15%. There were also other young players like Telenor, MTS, BSNL, and MTNL who were planning to leave the market or who wanted to be merged to survive.

Price Challenges – Reliance Jio Entry

For telecommunications workers who were dealing with costly problems and debt, the announcement that Jio was entering the telecommunications industry was a major blow. Jio has been working for almost six years, and acquired the pan-India 4G spectrum in 2010. The 4G network testing phase started in December 2015.

Idea-Vodafone Integration

To prove that the experts are real, the major telephone operators went into merger mode. Airtel acquires Telenor; business and scope from other small telecommunications companies such as Videocon, Augere Wireless, Tikona (4G Spectrum), etc. Reliance Communications (RCom) has agreed to merge with Aircel and acquire MTC; Tata Telecom was also in the process of merging with RCom. In just seven months after Jio took office, the number of telephone operators in the country dropped to seven out of twelve.

Challenges

However, the markets did not respond well to the merger. After the announcement, Idea’s price range began to decline. The share price dropped from Rs.97.70 on March 20, 2017 to Rs.81.80 on September 06, 2017. Analysts were of the opinion that this would be similar to a three-legged race with Usain Bolt. In other words, the feeling of competing with two leading brands (Airtel and Jio) for two different brands could be a daunting task.

Merger Analysis

Equal Ratio

The integration of Idea-Vodafone will be the grand launch of the telecom sector post Reliance JIO in September 2016. The promoters of Idea and Vodafone Group will be joint ventures of the integrated business and will have equal assurance rights for both promoters on key issues. Together, Vodafone will be allocated 364.50 crores shares containing 50.3% of Equity amounting to approximately INR 27,600 crores.

However, the Aditya Birla group will receive a 4.9% share of the combined business at Vodafone for INR 3900 crores (INR 109 / – per share) so the share of the Aditya Birla group reaches 26%.

Aditya Birla Group is also entitled to receive up to 9.5% of additional shares in Vodafone Group within three years after the closing of the contract at the agreed price of INR 130 per share. But these Aditya Group rights will be the work based on the growth achieved and the market value of the combined business.

Section Management

• CEO and COO – Joint appointment.
• CFO – Vodafone nomination.

While Idea and Vodafone will have joint control over the appointment of CEO and COO, the exclusive rights to appoint a CFO reside with Vodafone. Vodafone is therefore not only a major shareholder but also has many financial rights.

Board Building

• A 12-member board with 6 independent directors.
• Equal representation from Aditya Birla Group and Vodafone Group.
• Chairman: Mr. Kumar Mangalam Birla.

As the board is represented by both parties equally, the chairman has made a decision on Aditya Birla Group, but there is no clarity about voting.

Sharing 

• As mentioned, Aditya Birla Group is entitled to receive up to 9.5% of additional shares in Vodafone Group. Vodafone will not only be a major shareholder but will also have many financial rights.
• If Aditya Birla does not increase the stake within four years after the conclusion of the agreement, Vodafone also has the option to measure the pole in the next five years.
• If equity is not available, Vodafone Group sells a stake not exceeding the equity, voting on the excess stake held by Vodafone to be limited and used jointly by agreement.

Place of Assurance and Extension of Post Linking

• Creates a large Indian telecommunications company.
• Almost 400 million Subscriber Domains.
• Combined Market Budget of 40.7% and Customer Market Budget of 35.1%.
• Leadership position (# 1 / # 2 position) in 21 (out of 22) phone circles.
• The largest number of Mobile Voice available for 1.1 billion Indians.
• Pan India Broadband currently covers 650 million Indians; committed to 1.1 billion.
• Deep India infrastructure network of 273,000 GSM sites.
• The fastest growing Broadband mobile network of more than 189,000 sites.
• Release of mobile broadband extension services for geographies that are not available.

Spectrum

• A full range of 1,850 MHz over multiple bands.
• The auction received a free spectrum value of 1,645 MHz.
• Broadband portfolio (3G / 4G) at 1,429 MHz.
• Premium 900 MHz band in 17 circles.

Broadband Centre Skill

• 163 mobile broadband carriers – the highest among all operators.
• 3G – Pan India 344 networks with 2 carriers in 11 mobile leadership markets.
• 4G -Pan India 1294 networks and power supply up to 250 Mbps in 12 markets.
• A large fibre network of about 2,50,000kms.
• The ability to create a large amount of broadband in a wide range.

Distribution Channel

• Paid access prepares more than 2 million merchants.
• Enterprise & Retail paid back access through 30,000 ‘Field Sales Team.’
• The product strategy will be developed over time and will strengthen customer relationships in both existing products developed over the past decade.

Payment Banks

• Idea Money, M-Pesa, and Aditya Birla Payment Bank.
• Delivery of Payments Bank services, with the power of domain technology.
• A 400 million Canvas customer and M-Pesa global technology can be obtained from Digital Wallets. The consolidated storage business will have a single billing license (including digital wallets) in accordance with current guidelines. 

Line Maintenance Contributions

• Stable line extensions – Enterprise Wireline, ILL, MPLS, etc.
• Introduction of the latest broadband solutions such as FTTH, Wi-Fi, etc.
• Deep penetration into the Enterprise category across MNC, major clients and SMEs.

Important Signs

• Operating cost restructuring includes Network Infrastructure and IT Services Channel and service partner, product efficiency, etc.
• Reduced Network capex due to redistribution of scattered equipment, duplication of new equipment and spectrum integration.
• NPV estimated net synergies are estimated at INR 670 billion (NPV cost and capex synergies costs of shipping integration and spectrum release fee). 
• INR 140 billion annual transaction rate (60% of operating costs) for 4 years of full operation.

Collection of Funds

Details	IDEA	VODAFONE	Idea Integrated with Vodafone
Revenue	369	447	816
EBITDA	114	130	244
EBITDA (Margin) (% years)	30.89%	29.08%	30%
Net Credit	527	552	1,079
Net / EBITDA Debt	4.62	4.25	4.42
Capex	75	79	154
Total investment of Spectrum	617	788	1,405

The consolidated business will be able to make money from the sale of the Tower, 11.5% of Indus Towers Stake Sales and four-year partnership profits which will help the company reduce Net Debt / EBITDA to 3. While Vodafone also holds a 42% stake in Indus Towers, that is not included in the transaction perimeter.

Indian Mobile Operator

Details	IDEA-VODAFONE	AIRTEL TELENOR	JIO
Subscribers (million)	395	320	72
Income Market Budget (3QFY17)	40.70%	34.30%	0.30%
Customer Market Distribution (3QFY17)	35.10%	28.40%	6.40%
Optical Fibre Cable (‘000s KM)	250	224	250
Broadband Spectrum (MHz)	1,429	1,140	1,235

The Tax Debate

Ongoing tax dispute will not affect the merger of Vodafone-Idea.

Unique Product Name and Functionality

Until the merger is completed, Vodafone and Idea will be operational separately and after merger may use both brand names.

Market Movement

Since the announcement of the agreement on 20 March, 2017, the market price of Idea Cellular has declined by approximately 10-15%. It seems that the shareholders of the Idea Cellular community are not happy with the balance.

Valuation

Until the merger is completed, Vodafone and Idea will be operating separately and after merger they may use both brand names for at least a few years until a full customer migration. The transaction values Vodafone at Rs.82,800 crore (EV) and Idea for Rs.72,200 crore (EV) and debt of Rs.55,200 and Rs.52,700 crores respectively. Opinions are far more limited than the current market price and are also reflected in the declining price of Idea Cellular post announcement. Vodafone’s high ratings are supported by high revenue, customer base and full spectrum capture compared to Idea.

While Airtel is diverse with additional services and presence in South Asia and Africa it has a market capitalization by Rs.1,36,570 / – crores and debts of Rs.96,078 / – crores.

Vodafone’s concept is equally balanced and note that the Aditya Birla team made a fixed amount of dollars of Rs.109 per share to receive a share of 4.9% at the end of the merger (2018) from Vodafone Group. Also, there is an option to get a stake of 9.5% for Rs.130 per share over a 4-year period to bring about equality.

Sharing Changes

DETAILS	IDEA	IDEA VODAFONE POST MERGER	POST ADITYA GROUP ACQUISITION ON MERGER FROM VODAFONE	POST ADITYA TOTAL ACQUISITION FROM VODAFONE
IDEA Facilitators	42.45%	21.10%	26.00%	35.50%
Vodafone Promoters		50.30%	45.40%	35.90%
Social	57.55%	28.60%	28.60%	28.60%
Total	100%	100%	100%	100%

Conclusion

The merger between Idea and Vodafone will make them a top player. For the benefit of co-operative management, synergies of up to INR 670 billion can be acquired & INR 140 billion on operating costs for 4th year. It will also bring credit for the sale of Towers Assets to a consolidated business.

The concept of consolidation seems to save costs and financial opportunities that aid financial performance. And whether the company will be able to monetize the remaining spectrum must be seen.

Aditya Birla Group’s promoters are smart enough to integrate with Vodafone in this price war and at the same time they have the rights to measure the pole in stages. So far, there is no benefit for public shareholders and they will hope to benefit from the long-term merger.

References

https://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR530.htm

https://mnacritique.mergersindia.com/idea-vodafone-telecom-merger/

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