Vodafone India, Idea Cellular agree merger

Monday 20 March 2017 | 09:16 CET | News

Vodafone Group and Indian mobile operator Idea Cellular have agreed to combine their operations in India. The merger agreement excludes Vodafone's 42 percent stake in Indus Towers. Vodafone said the combined company would have almost 400 million customers across the country, with a 35 percent customer market share and 41 percent revenue market share. 

The merger of the second and third-largest operators in India will see the combined group take the top spot from Bharti Airtel in the mobile market. It's also expected to help the companies better compete against new entrant Reliance Jio, which acquired over 100 million customers in just six months since its launch. 

According to Vodafone, the deal also gives the companies sufficient spectrum to compete effectively with the other major operators in the market. It would hold a total 1,850 MHz, including 1,645 MHz of liberalised spectrum acquired through auctions. The name of the combined listed company will be changed in due course.

As part of the transaction, Idea will contribute all of its assets, including its standalone towers with 15,400 tenancies and its 11.15 percent stake in Indus Towers. Vodafone will contribute Vodafone India including its standalone towers with 15,800 tenancies, but excluding its 42 percent stake in Indus Towers.

Based on Idea's average share price of INR 72.5 over the 30 days prior to the initial merger announcement in January, the agreed ratio implies an enterprise value for Vodafone India of INR 828 billion (approximately USD 12.4 billion) and an enterprise value for Idea's mobile business of INR 722 billion (USD 10.8 billion), excluding its 11.15 percent stake in Indus. This is equivalent to valuing Vodafone India at 6.4x EV/LTM EBITDA and Idea excluding its stake in Indus Towers at 6.3x EV/LTM EBITDA.

Vodafone's contribution of net debt depend on Idea's net debt at completion as well as customary closing adjustments. Vodafone will contribute INR 25 billion (USD 369 million) more net debt than Idea at completion. Based on Idea's net debt of INR 527 billion (USD 7.9 billion) at end-2016, this would have implied INR 552 billion (USD 8.2 billion) of debt to be contributed by Vodafone.

Vodafone will own 45.1 percent of the combined company after transferring a 4.9 percent stake to the Aditya Birla Group for INR 39 billion (USD 579 million) in cash, concurrent with completion of the merger. The Aditya Birla Group will then own 26 percent of the combined company and Idea's other shareholders will own the remaining 28.9 percent. The Aditya Birla Group has the right to acquire up to a 9.5 percent additional stake from Vodafone.

Before the completion of the transaction, Vodafone and Idea plan to sell their standalone tower assets and Idea's 11.15 percent stake in Indus Towers to reduce leverage in the combined company. Vodafone will also explore strategic options for its 42 percent stake in Indus Towers. Potential options include either a partial or a full disposal, Vodafone said.

As the combined company will be jointly controlled by Vodafone and the Aditya Birla Group, Vodafone will deconsolidate Vodafone India immediately. The combined company will be reported as a joint venture by Vodafone and accounted for under the equity method, resulting in a decrease of Vodafone's net debt. At end-December 2016 this would have been INR 552 billion (USD 8.2 billion), which together with the INR 39 billion (USD 579 million) of cash received from the Aditya Birla Group would lower Vodafone Group's reported leverage by around 0.3x EBITDA. The transaction is expected to be accretive to Vodafone's cash flow from the first full year post completion.

The combination of Idea and Vodafone India is expected to generate run-rate cost and capex synergies of INR 140 billion (USD 2.1 billion) on an annual basis by the fourth full year post-completion. This is equivalent to a net present value of INR 700 billion (USD 10.5 billion), after integration costs. Operating cost savings represent 60 percent of the expected run-rate savings.

The major expected sources of cost and capex synergies include rationalising network infrastructure, generating operational efficiencies, lower maintenance expenses and savings in energy costs; higher spectrum availability and larger single radio access network (RAN) deployment coupled with re-deployment of overlapping equipment from rationalised sites, resulting in lower capex; service centres, back office and distribution efficiencies; streamlining regional and nationwide IT systems and evolving to a single IT system for the new entity; as well as optimising general and administration costs.

Vodafone and Idea also expect regulatory dis-synergies, mainly driven by spectrum liberalisation payments and requirements to meet regulatory spectrum caps and market share thresholds in certain circles one year after completion of the transaction. Spectrum liberalisation costs are estimated to have a net present value impact of INR 30 billion.

Following the completion of the transaction, the board of the combined entity will have 12 directors, including three directors appointed by each of Vodafone and the Aditya Birla Group, and six independent directors.

The Aditya Birla Group will have the sole right to appoint the chairman (as one of its three directors), who will be Kumar Mangalam Birla. Vodafone will have the sole right to appoint the CFO. Both Vodafone and the Aditya Birla Group will jointly agree on the appointment of the CEO and the COO. Those roles, together with those of the broader management team, will be confirmed prior to closing.

Pro forma net debt as at 31 December 2016 would have been INR 1 trillion (USD 16.1 billion). On this basis, leverage of the combined company would have been 4.4x LTM EBITDA. Pro forma for the sale of Vodafone and Idea's standalone towers as well as Idea's 11.15 percent stake in Indus and the estimated run-rate opex synergies, leverage would be 3.0x LTM EBITDA. The parties have also agreed a capital structure and dividend policy which is expected to be implemented post completion.

The transaction is subject to approvals from regulatory authorities and customary closing conditions. Vodafone and Idea have undertaken preparatory work on the required scheme and other necessary filings. Shareholder approval will be required from Idea shareholders. The transaction is not subject to approval from Vodafone shareholders. The transaction has a break-fee of INR 33 billion (USD 500 million) that would become payable under certain circumstances. Vodafone and Idea anticipate that completion will take place during the 2018 calendar year.

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