Vodafone, Idea Strike $23B Deal to Form India's Biggest Telco

The boards of Vodafone India and Idea Cellular have approved a $23 billion merger between the Indian operators that will create the country's biggest service provider, with nearly 400 million customers and annual revenues of around 800 billion Indian rupees ($12.24 billion). (See What Does Vodafone-Idea Merger Mean for India's Telecom Industry? )

The transaction, which does not include Vodafone India 's 42% stake in infrastructure player Indus Towers Ltd. , will give Vodafone 45.1% of the combined entity after it sells a 4.9% stake to Aditya Birla Group, Idea Cellular Ltd. 's controlling shareholder, for INR39 billion ($579 million). That will leave Birla with a 26% stake, and Idea's other shareholders with 28.9% of the company, but Birla will have the option in future of acquiring an additional stake of up to 9% from Vodafone to put its ownership on a par with Vodafone's.

The implied enterprise value of the merger is about INR828 billion ($12.4 billion) for Vodafone India and INR722 billion ($10.8 billion) for Idea, excluding its stake in Indus Towers. Those respective figures work out at roughly 6.4 times the annual EBITDA of Vodafone and 6.3 times that of Idea, excluding its Indus Towers stake.

India's second- and third-biggest operators, Vodafone and Idea had been in talks for several weeks about a merger of their businesses in India's fiercely competitive mobile market, where established operators have been struggling to cope with the arrival last year of 4G new entrant Reliance Jio .

Having captured as many as 100 million subscribers in just a few months by offering consumers free voice and data services, Jio has triggered a round of consolidation that has already seen a number of smaller players swallowed up by the industry giants. Market leader Bharti Airtel Ltd. (Mumbai: BHARTIARTL) previously snapped up Videocon Telecommunications Ltd. and Telenor, while Reliance Communications Ltd. , India's fifth-largest operator, bought MTS and Aircel Ltd.

But the merger between Vodafone and Idea is perhaps the biggest deal India has seen since UK-based Vodafone Group plc (NYSE: VOD) paid $11.1 billion ($13.8 billion, at today's exchange rate) in 2007 for a controlling stake in Hutchison Essar.

For one thing, the tie-up will dethrone Bharti Airtel as the largest service provider in the country. In a statement, Vodafone said the combined entity would also have the investment ability to speed up the rollout of mobile broadband services based on 4G, 4G+ and 5G technologies. Vodafone expects to realize cost and capital expenditure "synergies" from the merger that carry a net present value of about INR670 billion ($10 billion) and says the deal should be "accretive" to its cash flow from the first full year post completion.

"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," said Vittorio Colao, Vodafone Group's CEO, in the statement.

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But a number of details have yet to be worked out, including the brand name of the new-look player. While Kumar Mangalam Birla, the group chairman of Aditya Birla Group, will be the chairman of the company, the boards of Vodafone and Idea will together need to reach agreement on the appointments of a chief executive and chief operating officer. Vodafone, meanwhile, will have exclusive rights to appoint a chief financial officer.

Regulation might also be a stumbling block. The plan is to complete the merger sometime in the 2018 calendar year, but India's authorities could always hold things up. At the very least, the company may have to relinquish spectrum holdings in some parts of the country due to regulations that prohibit any single player from controlling more than half of the available spectrum. Regulations might also require the operator to offload some of its customers in these areas.

Such mega mergers can also be difficult to execute from a purely operational perspective. One concern will be that customer service and other quality measures take a pounding at Vodafone-Idea while the players are focused on integrating their assets. That would give rivals an opportunity to eat into the company's market share.

In its own statement on the merger plans, Idea said that Vodafone would in future have to adjust its own shareholding in the combined entity if the two companies are not on an equal ownership footing.

"If Vodafone and the promoters of Idea do not have equal shareholding by the expiry of the fourth year from the completion of amalgamation, Vodafone is obliged to reduce its holding in order to equalize its ownership with that of the promoters of Idea over the following five years," said Idea.

Both Vodafone and Idea plan to sell their stakes in Indus Towers, a infrastructure sharing company venture that also involves Bharti Airtel. Vodafone owns a 42% stake in Indus Towers, while Idea has 11.15% of the company.

— Gagandeep Kaur, contributing editor, special to Light Reading