Vodafone Group Plc’s India unit and Aditya Birla Group company Idea Cellular Ltd have agreed to merge in a transaction that will create the country’s biggest telecom operator, valued at $23.2 billion.
The move comes after the entry of billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd late last year threw the telecom industry into turmoil and even prompted current top carrier Bharti Airtel Ltd to acquire the Indian business of Norway’s Telenor ASA.
“The combined entity will have the scale required to ensure sustainable consumer choice in a competitive market and to expand new technologies – such as mobile money services,” Vodafone Group CEO Vittorio Colao said in a statement.
The combined entity will have 400 million users and 35% market share by number of customers in India. It will have a 41% market share by revenue. The deal implies an enterprise value of $12.4 billion for Vodafone India and $10.8 billion for Idea.
Vodafone will own 45.1% of the combined company after transferring a stake of 4.9% to the Aditya Birla Group for Rs 3,900 crore ($579 million) in cash. The Indian group will then own 26% and has the right to acquire 9.5% more from Vodafone to equalise their holdings over time, the two companies said in a statement on Monday.
If the two partners’ holdings in the combined company are not equal after four years, Vodafone will sell shares to equalise its shareholding to that of the Aditya Birla Group over the following five-year period.
The two companies had announced in January that they were in talks for a merger. The merger will also enable Vodafone to list its India operations on the stock exchanges as Idea is publicly traded.
Aditya Birla Group chief Kumar Mangalam Birla will be the chairman of the joint entity. Vodafone will have the right to appoint the chief financial officer, while both parties will agree on a CEO and COO. The merger is likely to be completed in 2018.
The deal involves a break fee of $500 million. Idea shareholders will have to clear the deal but the transaction is not subject to approval from Vodafone shareholders.
Tower assets, synergy
Both Idea and Vodafone intend to sell their standalone tower assets prior to deal completion. Idea’s 11.5% stake in Indus Towers will also be sold to reduce debt of the merged company. Vodafone will explore strategic options for its 42% stake in Indus Towers, which include partial or full disposal of its holding.
The companies expect some rationalisation to meet regulatory spectrum caps and market share threshold over the next year.
As per a recent CLSA analysis, the merged entity will exceed revenue and subscriber market share as well as spectrum caps in five of the 22 telecom service areas India is divided into.
The merged entity is likely to rationalise network infrastructure, generating Rs 14,000 crore ($2.1 billion) in savings per year by the fourth year of deal completion. This will work out to $10.2 billion in savings after integration costs.
The transaction will help Vodafone Group reduce its debt as it will now report its India operations as a joint venture. Also, Vodafone India’s net debt of Rs 52,200 crore as on 31 December 2016 will fall after the cash infusion by the Aditya Birla Group.
Consolidation in the telecom sector
This deal trumps the merger of the wireless operations of Reliance Communications Ltd, controlled by Mukesh Ambani’s brother Anil, and Aircel Ltd to create India’s fourth-largest telecom operator.
Reliance Communications had earlier acquired Sistema Shyam Teleservices.
Reliance Communications and Reliance Jio have also been trading and sharing spectrum assets, which Anil Ambani had labelled as a ‘virtual consolidation’.
In February, Bharti Airtel acquired the Indian business of Telenor.
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