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
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
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
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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