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Vodafone and Idea announce merger, to create largest Telco in India
Ashish Sharma |  New Delhi |  20 Mar 2017

Vodafone and Idea Cellular will merge to create India’s largest telecom service provider with a subscriber base of 400 million. It will have a market share of 35% in terms of customers. It will account for 41% of the total revenue of the sector.

On Monday, the two companies announced reaching an agreement to combine their operations.

The merged entity will be benefitted by the scale of operations that will bring down the costs. It will help the company to fight tariff war due to entry of a new operator – Reliance Jio.

According to the officials, the merged entity will maintain the two brands separately.

Initially, Vodafone will be a dominant partner in the merged entity with 45.1% stake after it will transfer a stake of 4.9% to the Aditya Birla group for Rs 3,874 crore in cash to complete the merger. Aditya Birla group will then own 26% stake in the company but it will have the right to acquire more shares from Vodafone under an agreed mechanism with a view to equalize the shareholding over time.

Aditya Birla Group Chairman, Kumar Mangalam Birla will be the Chairman of the company, while CFO will be from Vodafone.

For benefit of our readers we are reproducing relevant part of the press statement issued by the companies:

Idea will contribute all of its assets including its standalone towers with 15.4k tenancies and its 11.15% stake in Indus Towers.

Vodafone will contribute Vodafone India including its standalone towers with 15.8k tenancies but excluding its 42% stake in Indus Towers.

The merger ratio is consistent with recommendations from the joint independent valuers. Based on Idea’s undisturbed share price (INR72.5 based on the 30 trading day VWAP as at 27 January 2017), the agreed merger ratio implies an enterprise value for Vodafone India of INR828 billion (US$12.4 billion) and an enterprise value for Idea’s mobile business of INR722 billion (US$10.8 billion), excluding its 11.15% stake in Indus. This is equivalent to valuing Vodafone India at 6.4x EV/LTM EBITDA and Idea excluding its stake in Indus Towers at 6.3x EV/LTM EBITDA.

Vodafone’s contribution of net debt will be dependent on Idea’s net debt at completion as well as customary closing adjustments. Vodafone will contribute INR25 billion (US$369 million) more net debt than Idea at completion. Based on Idea’s net debt of INR527 billion (US$7.9 billion) as at 31 December 2016, this would have implied INR552 billion (US$8.2 billion) of debt to be contributed by Vodafone.

Vodafone will own 45.1% of the combined company after transferring a 4.9% stake to the Aditya Birla Group for INR39 billion (US$579 million) in cash, concurrent with completion of the merger. The Aditya Birla Group will then own 26.0% of the combined company and Idea’s other shareholders will own the remaining 28.9%.

The Aditya Birla Group has the right to acquire up to a 9.5% additional stake from Vodafone under an agreed mechanism with a view to equalising the shareholdings over time. If the Aditya Birla Group does not equalise its stake, Vodafone will reduce its holding in order to equalise its ownership with that of the Aditya Birla Group. Until equalisation is achieved, the additional shares held by Vodafone will be restricted and votes will be exercised jointly under the terms of the shareholders’ agreement.

Prior to completion of the transaction, Vodafone and Idea intend to sell their standalone tower assets and Idea’s 11.15% stake in Indus Towers to reduce leverage in the combined company. Vodafone will also explore strategic options for its 42% stake in Indus Towers; potential options include either a partial or a full disposal.

As the combined company will be jointly controlled by Vodafone and the Aditya Birla Group, Vodafone will deconsolidate Vodafone India immediately. Post-closing, the combined company will be reported as a joint venture by Vodafone and accounted for under the equity method, resulting in a decrease of Vodafone’s net debt. As described above, as at 31 December 2016 this would have been INR552 billion (US$8.2 billion), which together with the INR39 billion (US$579 million) of cash received from the Aditya Birla Group would lower Vodafone Group’s reported leverage by around 0.3x Net Debt/EBITDA.

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