Aurum Deal of the Month – April 2017
The transaction does not include Vodafone’s 42% stake In Indus Towers. Idea and Vodafone will each hold equal stakes in the merged entity. The shareholding structure will be achieved in the following manner :
- Vodafone will sell 4.9% at a price of INR 110 per share to Idea’s promoter – the Aditya Birla Group (ABG) – to reach 45.1% stake while enabling ABG to reach the critical 26% stake threshold. The other 28.9% shareholding will be held by non-promoter shareholders of Idea.
- ABG, will have the option to purchase a 9.5% stake from Vodafone over the next four years at a consideration of INR 130 per share to bring the final shareholding of ABG and Vodafone to 35.5% each
- Vodafone India and Idea Cellular will sell their respective standalone towers along with Idea’s 11.2% stake in Indus Towers in order to reduce leverage in the combined entity. Vodafone India and Idea have 10,500 and 8,800 towers respectively.
- The board of the combined entity will comprise of 12 directors, with three (including KM Birla role as chairman) appointed by Idea and three appointed by Vodafone India. The balance (50% of total directors) will be independent.
- Vodafone and Idea expect the deal to complete in CY18 and a breakup fee of INR 33 billion becomes payable under certain circumstances.
The transaction is subject to approvals from the relevant regulatory authorities and other customary closing conditions. The proposed merger requires approvals from the stock exchanges, Securities and Exchange Board of India, National Company Law Tribunal and the Competition Commission of India, besides the court and the Department of Telecommunications (GoI). The three key areas of scrutiny would be revenue market share, subscriber market share and spectrum holdings.
Merger Rules – Limits in India
|Subscriber market share||50%|
|Revenue market share||50%|
|% Spectrum held out of total spectrum assigned in the circle for access services||25%|
|% Spectrum held in a given band||50%|
A hindrance to the deal could arrive from the regulatory conditions regarding the combined Revenue Market Share (RMS). As per the Circle-by-circle analysis, the proposed combined entity would be over the 50% threshold in six circles.
RMS across circles (Sep 16, TRAI)
The combined entity will have over 400 million subscribers and nearly 41% revenue market share
Source: Company Reports, MOSL
Idea and Vodafone combined currently have 273,000 GSM and 189,000 mobile broadband sites. The combination intends to rationalise the total number of sites to ~225,000 and eliminate 30-40% redundancy in mobile broadband sites, which can be redeployed to enhance network capacity and coverage.
Management indicated cost and capex synergies of USD 10.5 billion at net present value, post adjusting for integration costs and spectrum liberalisation payments. Annual savings are estimated at USD 2.1 billion by the 4th year post completion. Also, Vodafone is strong in urban markets, Idea in rural markets.
Key Areas of Synergy (Source: Company, Edelweiss)
|Brand & Advertising||
The Indian telecom sector is going through turbulent times, with most operators reporting losses and struggling with high debt. Industry revenue is under pressure, with the new operator offering free services. Even larger operators are facing the pressure from the increased competition. The competitive intensity driven by Jio’ aggressive push to acquire customers has seen prices and realizations take a nosedive in the last 6 months. Reliance Jio is now reporting 100 million customers after only 6 months of business.
Indian mobile service revenue growth (Source: Company Data, HSBC)
Bharti Infratel is likely to be the biggest loser in case of reduction in the total number of sites as the combined entity will look at doing away with duplicate sites resulting in lower number of tenancies for Bharti Infratel. However, the Vodafone-Idea merger is likely to improve overall industry structure. It would move the industry to three large players and might result in relatively better pricing medium term. Such a merger might put a check on the disruption caused Jio and could cause a shift in pricing strategy from disruptive to just competitive.