Idea, Vodafone India announce merger, to combat Reliance Jio

With the aim to create India's largest telecom operator, Vodafone and Idea Cellular announced that they have reached an agreement to combine their operations in India (excluding Vodafone's 42% stake in Indus Towers).

Aditya Birla Group Chairman, Kumar Mangalam Birla, said, "Throughout its history, the Aditya Birla Group has been synonymous with the task of nation building and driving inclusive growth in the country. This landmark combination will enable the Aditya Birla Group to create a high-quality digital infrastructure that will transition the Indian population towards a digital lifestyle and make the Government's Digital India vision a reality. For Idea shareholders and lenders who have supported us thus far, this transaction is highly accretive, and Idea and Vodafone will together create a very valuable company given our complementary strengths."

Vodafone Group Plc Chief Executive, Vittorio Colao said: "The combination of Vodafone India and Idea will create a new champion of Digital India founded with a long-term commitment and vision to bring world-class 4G networks to villages, towns and cities across India. The combined company will have the scale required to ensure sustainable consumer choice in a competitive market and to expand new technologies - such as mobile money services - that have the potential to transform daily life for every Indian. We look forward to working with the Aditya Birla Group to create value for all stakeholders.

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The combined company would become the leading communications provider in India with almost 400 million customers, 35 percent customer market share and 41 percent revenue market share.

Post the amalgamation, Vodafone will hold 45 percent in the combined entity while Idea promoters will hold 26 percent share. The rest will be held by the public.

The combined entity of Aditya Birla group's Idea Cellular and Vodafone India will have the widest network in the country and pan-India 3G/4G footprint, the companies said in a statement.

"The combination of Vodafone India and Idea will create a new champion of Digital India founded with a long-term commitment and vision to bring world-class 4G networks to villages, towns, and cities across India. The combined company will have the scale required to ensure sustainable consumer choice in a competitive market and to expand new technologies - such as mobile money services - that have the potential to transform daily life for every Indian. We look forward to working with the Aditya Birla Group to create value for all stakeholders."

Rajan S Mathews, Director General, COAI says, that "this amalgamation will create the country's biggest telecom services provider with a customer base of over 394 million, " adding that we have seen some significant consolidations in the past and this announcement is a welcome and positive step in the direction of TSP coming together and creating resilient networks with a large asset base for an enhanced consumer experience.

Prashant Singhal, Global Telecom Leader EY said "Market consolidation is positive for the telecoms sector and the consumer. As operators grapple with excessive competition and pressurised margins, consolidation will help bring synergies and unlock greater cost efficiencies. The consumers will also benefit as the telco strategy will now pivot on innovation to offer value in terms of quality of service and content. Now that the sector is inching towards its ideal state, it is imperative for the Government to expedite approvals for the industry to realise the benefits."

"Since 2008, increased hyper-competition has been impacting revenue streams across all new and old operators. There has been a continuous increase in expenditure due to high costs of Spectrum acquisition and a severe financial burden on the industry caused by extremely high and multiple levies and taxes. Operators have also had to re-acquire Spectrum in order to continue operations." he said.

"There is currently a tariff war in the market which may not be sustainable for long. This has also severely impacted the revenue stream of operators, not just in terms of an increase in cost but also in terms of a marked decline in the revenue stream. All these have put the financial condition of this industry at risk and increased the debt to Rs 4.3 Lakh crore, also leading to a severe decline in government revenues from the industry," he added.

Here are the highlights of the deal are

1) Vodafone to combine its subsidiary Vodafone India (excluding its 42% stake in Indus Towers) with Idea, which is listed on the Indian Stock Exchanges.

2) The highly complementary combination will create India's largest telecom operator1 with the country's widest mobile network and a strong commitment to deliver the Indian government's 'Digital India' vision.

3) Sustained investment by the combined entity will accelerate the pan-India expansion of wireless broadband services using 4G/4G+/5G technologies, support the introduction of digital content and 'Internet of Things'(IoT) services as well as expand financial inclusion through mobile money services for the benefit of Indian consumers, businesses, and society as a whole.

4) The merger of equals with joint control of the combined company between Vodafone and the Aditya Birla Group, governed by a shareholders'' agreement.

5) The merger ratio is consistent with recommendations from the joint independent valuers. The implied enterprise value is Rs 828 billion ($ 12.4 billion) for Vodafone India and Rs 722 billion ($ 10.8 billion) for Idea excluding its stake in Indus Towers.

6) Substantial cost and capex synergies with an estimated net present value of approximately Rs 670 billion ($ 10.0 billion) after integration costs and spectrum liberalization payments, with estimated run-rate savings of Rs 140 billion ($ 2.1 billion) on an annual basis by the fourth full year post completion.

7) Vodafone will own 45.1 percent of the combined company after transferring a stake of 4.9 percent to the Aditya Birla Group for circa Rs 39 billion (circa $579 million) in cash concurrent with the completion of the merger. The Aditya Birla Group will then own 26.0 percent and has the right to acquire more shares from Vodafone under an agreed mechanism with a view to equalizing the shareholdings over time.

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8) If Vodafone and the Aditya Birla Group's shareholding in the combined company are not equal after four years, Vodafone will sell down shares in the combined company to equalize its shareholding to that of the Aditya Birla Group over the following five-year period.

9) Until equalization is achieved, the voting rights of the additional shares held by the Vodafone will be restricted and votes will be exercised jointly under the terms of the shareholders' agreement.

10) Vodafone India will be deconsolidated by Vodafone on the announcement and reported as a joint venture post-closing, reducing Vodafone Group net debt by approximately Rs. 552 billion ($8.2 billion). The transaction is expected to be accretive to Vodafone's cash flow from the first full year post-completion.

11) The transaction is expected to close during the calendar year 2018, subject to customary approvals.