Voda-Idea merger: Breaking down the numbers

British telecom major Vodafone and Aditya Birla group-run Idea Cellular on Monday  announced the merger of their Indian operations, creating the largest mobile operator by customer and revenue market share.

The merged entity, which will come into force over the next two years, will be headed by Kumar Mangalam Birla as chairman.

Vodafone will have its nominee as the chief financial officer, its CEO Vittorio Colao said here at a press meet, which was also attended by Birla.

The all-share merger for both partners excludes Vodafone's 42 per cent stake in Indus Towers and will be effected through issuing new shares in Idea to Vodafone and result in Vodafone deconsolidating Vodafone India.

Vodafone will own 45.1 per cent in the new company after transferring 4.9 per cent to the Aditya Birla group for Rs 3,874 crore in cash concurrent with completion of the merger.

Idea will hold 26 per cent of the combined entity while the rest will be owned by public shareholders.

Idea and Vodafone said the merged entity will be jointly controlled by Vodafone and the Aditya Birla group as per shareholders' agreement.

With 204.68 million customers, Vodafone enjoys a market share of 18.16 per cent. Idea has 16.9 per cent with 190.51million customers as of December 2016, according to Trai data.

Airtel, with a market share of 23.58 per cent and a customer base of 265.85 million, leads the market both in terms of revenue and customer base.

According to the CLSA report in January, the merged entity will have revenue of over Rs 80,000 crore, translating into a 43 per cent share by revenue and 40 per cent by active subscriber base with around 400 million customers.

The combined venture will account for over 25 per cent of the allocated spectrum and will have to sell about 1 per cent (worth Rs 5,400 crore) to comply with spectrum cap norms.

"The merger pegs implied enterprise valuation of Rs 82,800 crore (USD 12.4 billion) for Vodafone India and Rs 72,200 crore (USD 10.8 billion) for Idea," according to an exchange filing by Idea.

The companies had a net debt of Rs 1.07 trillion as of December 2016.

The Vodafone chief, who ruled out any chance of the lingering tax dispute with the government to affect the merger process, also said both the companies will have three representatives each on the board of the new company.

Colao also said the merger makes possible synergies of USD 10 billion.

He also added that both the brands, considering their strengths, will continue to operate separately.

Indicating Vodafone's intention of gradually exiting the country, Colao and Birla said over a period, both companies will have equal stakes in the merged entity.

Birla said the fund for picking up 4.9 per cent of Vodafone stake for Rs 3,874 crore will come from the promoters, and not from Idea.

He also ruled out any major downsizing at Idea post merger.

The scheme of amalgamation includes Vodafone India (VIL) and its wholly-owned subsidiary Vodafone Mobile Services (VMSL) merging with the new company.

Vodafone will keep its 42 per cent consideration in Indus Towers out of the merger process.

The turnover of Vodafone India is Rs 5,025 crore and that of Vodafone Mobile Service is 40,378 crore. Idea's turnover is Rs 36,000 crore.

The net worth of VIL is 12,855 crore, VMSL's Rs 3,737 crore and Idea Rs 24,296 crore.

The Birlas will have the right to acquire more shares from Vodafone under an agreed mechanism with a view to equalising the shareholdings over time, said a joint statement by the two companies.

The merger will result in substantial cost and capex synergies with an estimated net present value of around USD 10 billion after integration costs and spectrum liberalisation payments, with estimated savings of USD 2.1 billion annually from the fourth year of the merger.

Vodafone India will be deconsolidated by Vodafone and reported as a joint venture post-closing, reducing the Vodafone group's net debt by around USD 8.2 billion.

Colao said that to help the Birla group increase the shareholding in the combined company after four years, Vodafone will sell shares over the following five-year period.

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

The AB group will have the right to buy 9.5 per cent in the entity at Rs 130 per share.

Given the present spectrum holding, revenue and subscriber base, both the companies need to work on synergy to comply with rules.

As per the merger and acquisition rules, an entity should not hold over 25 per cent spectrum allocated in a telecom circle and 50 per cent of spectrum allocated in a particular band in a service area.

The merged entity should also not have more than 50 per cent revenue and subscriber market share.

European brokerage CLSA recently said the merged entity will breach revenue market share, subscriber and spectrum caps in five markets.

The combined entity is expected to cross the spectrum cap in 900 Mhz band in Maharashtra, Gujarat, Kerala, Haryana and UP West and in 2,500 Mhz band in Maharashtra and Gujarat.