On the cards: A telecom giant with Rs 80k crore in revenues

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Merger of Vodafone’s India operations and Idea Cellular creates India’s largest telco

The Aditya Birla group owned Idea Cellular and the world second largest telecom operator Vodafone Plc on Monday, announced the much expected merger of their Indian operations creating the largest telecom player in the country with 400 million customers and 40 per cent revenue share.

The merger which is expected to be completed by end 2018 will create a combined entity with a total revenue of over Rs 80,000 crore. It will displace Bharti Airtel as the market leader in the world's second-biggest mobile telephony market.

In a news conference in Mumbai, Vodafone Group Plc chief executive officer (CEO) Vittorio Colao and Aditya Birla Group chairman Kumar Mangalam Birla said the merger would create a new champion of digital India.

“We are very complementary,” Colao said after the deal was announced, adding: “Idea is strong where Vodafone is weaker, Vodafone is strong where Idea is weaker.”

“The merger will result in savings of $10 billion through operational and capital synergies,” Birla said. He said even as the synergies will play out, he does not see a “significant downsizing” of the headcounts in the merged company, which is pegged at 50,000 by some estimates.

As part of the deal, Idea and Vodafone India would merge their operations at a swap ratio of 1:1 and Vodafone will own 45.1 per cent of the merged entity, after it transfers about 4.9 per cent to promoters of Idea or their affiliates for Rs 3,874 crore ($592.15 million) in cash.

Aditya Birla Group, the majority owner of Idea, will own 26 per cent while other shareholders will own the remaining 28.9 per cent. As part of the plan, Aditya Birla and Vodafone eventually aim to own an equal share of the joint venture, with a combined enterprise value of $23.2 billion.

According to the plan, the Birla group would have the right to acquire another 9.5 per cent stake from Vodafone in the next four years, so that both partners eventually hold equal stake in the company.

The merger comes in the back of fierce competition in the sector following the entry of the Reliance Jio, which has triggered a wave of consolidation in the telecom sector which is reeling under high debt and falling margins due to severe price war.

The enterprise value of Vodafone with 204.68 million customers and market share of 18.16 per cent, is pegged at $12.5 bllion and that of Idea is at $10.8 billion. Idea has 190.51 million customers and 16.9 per cent market share.

Idea would have the sole right to appoint the chairman, while Vodafone would appoint the chief financial officer. The appointment of a chief executive officer and a chief operating officer would require the approval of both companies, which would get the right to nominate three board members each.

The deal does not include Vodafone's 42 per cent stake in Indus Towers, a joint venture between the British group, a unit of Bharti Airtel and Idea. But Vodafone and Idea said they will look to reduce their tower assets exposure, including selling their stakes in the joint venture.

Idea's entire network, 11 per cent stake in the biggest tower players Indus Towers and the 49 per cent stake in a payments bank venture will be merged with Vodafone's two subsidiaries – Vodafone India and Vodafone Mobiles Services – to form a company with a combined enterprise valuation of $ 23.2 billion. But Vodafone's 42 per cent stake in Indus Tower is excluded from this all stock transaction.

The turnover of Vodafone India was Rs 5,025 crore and that of Vodafone Mobile Service is 40,378 crore. Idea’s turnover is Rs 36,000 crore. The net worth of Vodafone is Rs 12,855 crore, VMSL's Rs 3,737 crore and Idea Rs 24,296 crore.

Birla clarified that money from none of the listed companies of the group will be used to pay Vodafone for the stake.

The Idea scrips, which had rallied almost 50 per cent since the news on merger got out into the market in January, plunged 9.6 per cent to Rs 97.60 on the BSE on Monday.

On the crucial branding strategies, Colao said both the brands are very powerful and will continue to operate separately at least till the first four years. The merged entity will have to shed spectrum in a few circles due to breaching single operator holding caps, but Colao looked at as a minor adjustment which will not impact the deal. The new company will to surrender 1 per cent of the combined spectrum worth a tad over Rs 5,000 crore.

For the Vodafone Group, the biggest takeaway from the deal will be its ability to reduce debt by $ 8.2 billion and coupled with Rs 3,900 crore it will be getting from ABG, the net debt to pre-tax profit ratio will improve 0.3 times. The debt of the combined entity will be Rs 1.07 lakh crore and the first attempt will be to reduce leverage by selling off Idea's 11.15 per cent stake in Indus Towers, which is one of the largest in the space.

Even though it will save them a net of $ 10 billion, integrating the operations of Vodafone and Idea Cellular will cost the combined entity around Rs 13,400 crore, Idea managing director Himanshu Kapania told analysts.

“The integration cost accounted in the net synergy is estimated to be nearly Rs 13,400 crore from the completion until the first full year of operations," Kapania said.

With inputs from agencies

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