Vodafone, Idea agree on merger to create India mobile leader

2017-03-20 11:18 - Bloomberg: Siddharth Philip
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Mumbai - Vodafone Group agreed to merge its Indian unit with Idea Cellular to create a leader in the world’s second-largest mobile phone market.

Vodafone Group and Idea Cellular will initially equally own the venture. The European carrier will control 45.1% of the combined company after selling a 4.9% stake in the new entity to billionaire Kumar Mangalam Birla’s holding companies, according to a stock exchange filing on Monday.

Birla’s companies will take a 26% holding, with the remainder being held by the public.

The enlarged wireless operator would have 395 million subscribers, exceeding those of market leader Bharti Airtel.

The transaction will help Vodafone unload an unprofitable business that has prompted it to announce $12bn of additional investment and write down to fight competition from billionaire Mukesh Ambani’s start up.

The new company is worth $23.2bn, based on the combined enterprise value of $12.4bn for Vodafone India and $10.8bn for Idea Cellular.

The Birla companies will pay 108 rupees ($1.7) apiece for the 4.9% stake in the merged entity, Saurabh Agarwal, head of strategy at the group, said at a press conference in Mumbai.

The companies will have to pay 130 rupees a share if they want to raise their stake in the first three years and pay the market price in the fourth year, he said.

Shares of Idea Cellular fell 7.6% to 99.90 rupees as of 1:26 in Mumbai, after initially surging as much as 15%.

Bigger scale

The merger will help better utilize spectrum and the combined entity will have complementary footprint across India, Vodafone Group chief executive officer Vittorio Colao said at the press conference. The deal gives higher return to shareholders due to the bigger scale of the new entity, he said.

The combined entity will need to reduce spectrum it holds in a few regions to meet regulatory norms, said Colao. The excess airwaves will either be sold or returned to the government if they can’t find a buyer, he said.

Vodafone and Idea will each control three seats on the board of the new company, which in addition will have six independent directors. Birla will have the right to appoint a chairperson.

Vodafone would gain a listing in the world’s second-largest wireless market, which it has been considering since at least 2011. Idea’s promoters will buy the 4.9% stake in the merged entity for 38.74bn rupees ($592m) in cash, on completion of the transaction.

The latest transaction is expected to be completed in 2018, according to the statement. It’s the biggest deal to emerge after Ambani’s Reliance Jio Infocomm stormed into the market last year by offering free calls and data, pressuring other carriers to consolidate.

Intense competition

Last month, Bharti agreed to acquire Telenor ASA’s Indian business. The Norwegian state-controlled carrier said at the time that prospects for the industry didn’t warrant further investments.

The competition among the different carriers will continue as they fight for market share in data, according to Rajan S. Mathews, the director general of Cellular Operators Association of India.

"Now everybody is competing very aggressively for data share and that means there will be continued pressure on prices," said Mathews.

"Increasingly, operators will start looking to future opportunities like Internet of Things and cloud computing, and begin to focus on these to augment their revenues and profitability."

Birla units, including Aditya Birla Nuvo, own 42% of Idea, according to the company’s website. Malaysian carrier Axiata Group Bhd has a 20% stake. Vodafone India is a wholly owned unit of Vodafone.

In the quarter ended December 31, Idea reported its first loss for the group in about a decade. Idea reduced its voice calling rates by 11% and mobile data rates by 15% from the previous quarter.

Free calls and data offered by Reliance Jio also reduced data consumers on its network.

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