The deal will see Aditya Birla Group, the promoters of Idea, gradually raising its stake in the combined entity while Vodafone Group will reduce its own, with the aim of both holding equal stakes over a period of time.
As a first step, AB Group will acquire 4.9 per cent from Vodafone for Rs 3,874 crore, or Rs 108 a share, to take its stake to 26 per cent, with Vodafone holding 45.1 per cent. Further, the company will have the right to buy another 9.5 per cent (at Rs 130 a share or the prevailing markprice, depending on the time of purchase) in the combined entity over four years from the British telecom firm.
Kumar Mangalam Birla will be the chairman of the new entity. Vodafone will name the chief financial officer while the two companies will jointly name the CEO and operations head before the closure of merger, expected within 24 months. The new entity will remain listed and be renamed at a later stage. The promoters of Idea and Vodafone will have the right to nominate three members each on the board, which will have 12 directors, six of whom will be independent.
The merger ratio is based on Idea's price of Rs 72.5 a unit. The companies added that implied enterprise value is Rs 82,800 crore for Vodafone India and Rs 72,200 crore for Idea, excluding its 11.15 per cent stake in Indus Towers. All of Vodafone India's businesses, barring its 42 per cent stake in Indus Towers, will become part of the new entity. Malaysia's Axiata, which holds around 20 per cent in Idea, will see holding diluted proportionately. The company said its next step will be based on maximising benefits to shareholders.
This merger was important at this point of time as Indian Telecom Industry is disrupted by Reliance Jio's tariff and offers. The merged entity, with its scale, size and synergies, will be a stronger rival to Reliance Jio Infocomm.
MERGER TERMS
Under the merger terms, AB Group has the right to increase its stake from 26 per cent by buying another 9.5 per cent from the UK telco at Rs 130 apiece in three years, within which time frame both companies can't buy or sell any shares from or to a third party. If Idea still hasn't raised its stake adequately in that time, it still has the option to buy the remaining shares needed to equal Vodafone's shareholding within the fourth year, but at prevailing market rates.
If Vodafone and the Aditya Birla Group's shareholdings in Idea are still not equal at the start of the fifth year, the UK company will sell shares in the combined entity to bring it on par with that of the Indian group over the next five years. Until the share equalisation is complete, additional shares held by Vodafone will be restricted and votes will be exercised jointly, the statements added.
Birla later told reporters that any funding needed to raise the group's stake won't come from its listed companies. He said there will be no significant downsizing after the merger.
The merger will result in the Indian telecom landscape being dominated by three strong private firms - Vodafone-Idea, Bharti Airtel and Jio - along with state-owned BSNL. It will possibly begin the process of renewing price discipline in an industry rocked by Jio's disruptive entry.
Idea Cellular managing director Himanshu Kapania expects the industry to return to double-digit growth in 12-18 months. The company posted its first net loss since listing in 2007 in the December quarter, hurt by the price war following Jio's offerings.
Last year, Vodafone was forced to write down value of its India business by over Rs 36,000 crore and infuse over $7 billion, which has been struggling to stay competitive amid severe competition.
"We now have a bigger listed company with a lot of value, lots of assets, spectrum, can compete in the future very effectively. It will give higher return on capital to investors because we have higher scale," said Vodafone Group chief executive Vittorio Colao.
Speaking exclusively to ET, Colao looked back at Vodafone's India story since 2007 when it entered the country, and called the regulatory environment here "complicated." He noted that while it has enjoyed growth, it has had to deal with issues such as high taxes and spectrum prices.
"India is a complicated environment - we have got taxes, but also daily requests for taxations. I do think that the spectrum has been sold at a very high price. Probably too high a price," he said, but added that the company wasn't planning to exit what is still the world's fastest growing market by subscribers.
He added that the long-standing Rs 20,000-crore tax dispute with the Indian authorities has nothing to do with this transaction. "There is an arbitration between Vodafone Group Plc and the government, and the government has indicated it wants this arbitration to continue. The judicial process is to follow," he said.
BRANDING
Colao said both Idea and Vodafone, which first announced merger talks back in January, will continue to operate as independent brands in India. "We are very complementary. Idea is strong where Vodafone is weaker. Vodafone is strong where Idea is weaker," he said, referring to the fact that Vodafone is typically stronger in urban areas while Idea is better placed in rural and semiurban regions.
The telecom industry is in the grip of consolidation. Reliance Communications, Aircel and MTS are working on a merger while Bharti Airtel recently announced it was taking over Telenor's India business.
Poor financial health of the sector is behind the trend, said Rajan Mathews, director general of Cellular Operators Association of India . He, however, said this was a positive development benefiting customers, operators and the government.
Vodafone will contribute Rs 2,500 crore ($369 million) more net debt than Idea upon closure of merger. Based on Idea's net debt of Rs 52,700 crore at December end, Vodafone would contribute Rs 55,200 crore of net debt to the merged entity.
"The combined entity would thus remain highly leveraged, and need some form of capital infusion," Credit Suisse said in a note.
Prior to completion of the deal, Vodafone and Idea intend to sell standalone tower assets and Idea's 11.15 per cent stake in Indus Towers to reduce debt in the combined company. Vodafone will also explore strategic options for its 42 per cent in Indus Towers, including partial or a full sale. Both companies are reported to have been in talks to sell tower businesses.
The Idea-Vodafone pact also has a break-fee of Rs 3,300 crore ($500 million) that would become payable under certain circumstances. They didn't elaborate. Vodafone, which entered India in 2007 by buying Hutchison Whampoa's 67 per cent in Hutchison Essar, will be separated from the parent, and will be treated as a JV, reducing Vodafone Group net debt by Rs 55,200 crore and leverage by around 0.3x net debt/Ebitda. The transaction is expected to be accretive to Vodafone's cash flow from the first full year post-completion.
But the entity would also face some regulatory hurdles, mainly to do with liberalising administratively allocated airwaves and exceeding spectrum holding and market share limits in six circles each, which the companies need to conform with in a year of the merger's completion.
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