India’s second and third-largest mobile providers by subscribers, Vodafone India and Idea Cellular, have agreed to a ‘merger of equals’, through which the two will create a combined entity with a market share of over 35% and more than 395 million subscribers. Under the agreement, Idea Cellular will be amalgamated with Vodafone India and its wholly owned subsidiary, Vodafone Mobile Services Limited (VMSL). Following the merger, shares equal to 50% of the new entity’s post-issue paid up capital will be issued to Vodafone India’s UK-based parent, which will then sell a roughly 4.9% stake to the promoters of Idea Cellular – Aditya Birla Group – and their affiliates for INR38.74 billion (USD591.23 million) in cash. As such, Vodafone Group will hold a 45.1% stake in the new company, whilst Aditya Birla will own 26.0%, and Idea’s other former shareholders will take the remaining 28.9%. The parties have agreed to a standstill period for the first three years after closing, during which neither party can buy any shares from, or sell any shares to a third party. During that three-year period, Aditya Birla has the right to purchase a stake of up to 9.5% in the new firm from Vodafone at an agreed price – INR130 per share – with a view to equalising the two groups’ shareholdings. The deal is subject to approvals from relevant authorities and is expected to close during 2018.
According to a statement from Idea Cellular, the brand strategy of the new company will be determined at a later date, and will ‘leverage customers’ affinity for both existing brands, built up over the past decade.’ The document went on to state that ‘sustained investment by the combined entity will accelerate the pan-India expansion of wireless broadband services using 4G/4G+/5G technologies, support the introduction of digital content and Internet of Things (IoT) services as well as expand financial inclusion through mobile money services.’ Commenting on the potential synergies of the tie-up, Idea notes that its leadership in many semi-urban and rural markets will combine well with Vodafone’s strong position in the metro circles, and in areas where neither operator has a strong presence, it will ‘become the leading challenger with the scale to compete more effectively and enhance customer choice.’ The enlarged company will hold 1,850MHz of spectrum, including around 1,645MHz of liberalised spectrum acquired through auctions, although it may be required to reduce its spectrum holdings to comply with merger and acquisition guidelines.
Prior to the completion of the transaction, Vodafone and Idea intend to sell their respective standalone tower assets, including Idea’s 11.15% stake in Indus Towers to reduce leverage in the combined company. Vodafone’s 42% stake in Indus, meanwhile, is excluded from the deal, but the British group will explore options for the shares, including a partial or full disposal. The operators expected to generate cost and CAPEX synergies with a net worth of approximately INR670 billion after integration costs and spectrum liberalisation payments.
The merger ratio implies an enterprise value of INR828 billion for Vodafone India and INR722 billion for Idea Cellular. Vodafone will contribute INR25 billion more net debt than Idea Cellular and as such, its contribution will be dependent on Idea’s net debt at completion, as well as customary closing adjustments. Based on Idea’s net debt of INR527 billion at end-December 2016, Vodafone is expected to contribute debt of around INR552 billion.