Volatility hits Idea stock on merger deal with Vodafone

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Idea Cellular stock had a roller coaster ride on Monday, as its merger with Vodafone’s Indian subsidiary was announced. The stock hit both the upper and the lower circuits as investors tried to assess the contours of the deal and value Idea Cellular stock price based on the swap ratio and other details made available by the company to the stock exchanges.

The stock first hit the upper circuit at Rs 123.75 (per share) on BSE

and Rs 123.50 on NSE when the stock exchanges opened at around 9:15 am, but over an hour later, the gains withered and the stock hit the lower circuit at Rs 92 on BSE and Rs 92.35 on NSE.

A Sharekhan analyst tracking the Idea Cellular stock on Monday said, “The stock saw huge volatile swings as it surged nearly 15 per cent intraday, before plunging 15 per cent. The stock ended the day with a 10 per cent loss.” Idea Cellular finally closed at Rs 97.60 — down 9.55 per cent — on BSE and Rs 97.70 on NSE. Meanwhile, Vodafone stock also recorded a drop on the London Stock Exchange, falling half a per cent to close at £210.35.

A. P. Shukla, president at Joindre Capital Services, said, “The stock had a negative outlook on Monday as the deal only took into account of the acquisition of customers in the business. But after tower acquisition is also taken into account, the outlook for the stock is going to be positive as customers keep coming and going away, but towers are big assets and sale of tower business by Idea will help retire its debt.”

According to market sources, the merged entity will have a debt of around US$16 billion. Also, the merged entity will have several cost-cutting advantages after they compete as one big entity in the telecom industry.

Harsh Jagnani, sector head and vice president, ICRA, said, “The merged telco should also benefit from operational synergies which will allow it to curtail some expenses such as co-location rentals and energy costs, customer acquisitions and support teams and reduced expense on branding and advertising. This should translate into profitability uplift for the merged entity, although the same will take some time to materialise.”

At the same time, there are certain merger-related intricacies that need to be sorted out as the two companies undergo the merger process, ICRA’s Jagnani said.

“The transaction faces many challenges and would take almost a year to conclude. The merged telco would breach the spectrum holding cap in five circles in 900 MHz band and in two circles in the 2,500 MHz band; and likely to breach the revenue market share cap of 50 per cent in six circles. These would have to be resolved in a fixed time frame. Further, the debt levels of the merged telco would be high at around Rs 1,08,000 crore, which translates into a debt/EBITDA of approximately 4.4x. Both the entities would have to inorganically deleverage to rein in the debt,” Jagnani said.

The Birla Group strategist Saurabh Aggarwal blamed the fall in stock on a “misunderstanding” in the investor community, which has arrived at Rs 72.5 as the effective price per share post-merger after calculating a few ratios. “Stock price is not a relevant number to calculate how the deal value was arrived at,” he said.

raviranjan@mydigitalfc.com

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