M&A(Merger and Acquisition)

1. By: Vijaya Meghana C

2. Type of Merger:
¡ Horizontal Integration – Vodafone-Idea
¡ Vodafone and Idea were two telecommunication giants in India. Both the
companies had a nominal market share with some pricing power over the
customers. However, with the entry of Reliance Jio, all the telecom
companies took a significant hit. Jio launched offers that were too
attractive for the customers to avoid and gradually started to shift from
other companies to Jio. Let us look at a few numbers:
¡ With the combined resources, the merged entity was able to service a
larger customer base with relatively lower assets. The cost savings from
equipment, employees, operations and other heads led to an estimated
annual synergy of $2 Billion for the merged entity.

3. Industry Life cycle of Vodafone & Idea :

4. Motives of the Merger
¡ The main reason for the Vodafone-Idea merger was to tackle the rising dominance
of Reliance Jio in the Indian Tel' sector. This will result in a brutal price war
between all the major companies in this sector.
¡ While merging companies are typically quite confident about their synergy
benefits, most analysts agree thr Vodafone-Idea merger holds the potential for
significant cost savings. With a larger scale and elimination of duplicate ' margins
can rise substantially.
¡ The combined entify became the largest cellular services operator in prominent
circles. In a couple of circles, it will upstage Bharti Airtel as the number one
operator while in some other circles, it will graduate to a strong No. 2. It remains
to be seen that if the combined entify will retain a half-hearted presence in the
relatively smaller circles, or whether it will up the ante and aim for a strong Pan-
India focus.

5. ¡ The spectrum of Idea in two circles while vodafone India in seven circles,
whose permits are valid till 2021-22,is together valued at around Rs
12,000 cr as per the last auction price. These permits with Vodafone India
and Idea are not in common circles hence there could be potential
spectrum capital expenditure synergies between the companies.
¡ Before the merger , a market shares of l8.l6% of
vodafonelndiawith20,46,g0,000customersandamarketshare
¡ of16.g%o of Idea CellularLtd with 19,05,10,000 customers was suleyed"
The merger of Vodafone India and Idea Cellular has boosted
¡ the market share to 35% which has made it the country's largest telecom
operation leaving the Bharti Airtel off its top position.

6. Are the Motives of Merger
achieved ??
¡ The Reality The great Indian Telecom Battle
¡ -
Not very long ago, India had a booming telecom industry with a dozen operators
battling for market share in this billion user market .But three years ago, Reliance Jio
entered the sector which rock-bottom tariffs. A brutal tariff war started, which kicked
several operators out of the race to provide wireless services and left many with
battle scars. Today, just two other private operators, Bharti Airtel and Vodafone Idea
are left to compete with Jio.
¡ Vodafone Idea retains top spot in terms of subscriber base. But if one compares
India's number one and number tr players on metrics like profitability, revenue, 4G
data users and the growth trend of the operators' average revenue perus the results
that emerge boggle the mind. For starters, Vodafone Idea, with the largest user base,
made a net loss of ?4,8 crores in the June quarter while Jio made a profit of ?891
crores. Both companies have priced mobile services at almost similar levels. To be
sure, Vodafone Idea is in the midst of a merger integration exercise. The company
belief that it is delivering on its stated strategy although the benefits are not yet
visible in its topline. It also expected better financial performance going forward. But
that depends on when tariffs improve in the market, and the call is clearly in Jio's
hands.

7. Synergy - Financial & Operational
expected & met actually
¡ Synergy refers to the value addition made when two or more
entities merge to create a new entity and expand opportunities
and possibilities beyond what was available to the independent
entities . Bernstein Research’s Chris Lane estimates that
Vodafone and Idea could see a fall in market share and fail to
realise some of their potential synergies . They believe that
synergies are delivered only if staff is retrenched, network
overlaps completely eliminated, brands integrated and
marketing budgets cut-down. All of these strategies are
disruptive and generally result in share loss.
¡ Vodafone-Idea has announced that it won’t implement such
strategies. Only time will tell what how well Vodafone and
Idea synergise their operations and finances. The company’s
synergy expectations can be understood under two categories-
financial synergy and operating synergy.

8. ¡ Financial synergy
¡ Financial synergy is created through higher cash flows or through
the lowering of the cost of the capital. Vodafone has announced
that it expects synergy benefits to the tune of $10 billion in NPV
terms after integration of costs and spectrum liberalisation
payments and an estimated $2.1 billion of savings by the fourth
year of completion.
¡ The Indian telecom market conditions do not appear conducive,
but Vodafone has a good track record in other jurisdictions. In
Spain, where in 2014 Vodafone bought cable company Ono for
about 7.2 billion euro, and in Germany, where it took over Kabel
Deutschland for 7.7 billion euro in 2013, the new entities are on
track to deliver higher synergies than originally targeted. The
Spanish entity is set to deliver 40% more than the initially targeted
2 billion euro in NPV, while in Germany the additional synergistic
benefits is expected to be at around 17%

9. ¡ Operating synergy
¡ Operating synergy is created by increase in income through the
use of existing assets . In the Vodafone-Idea merger, we will see
the development of economies of scale, primarily due to the
horizontal nature of the merger, resulting in a more cost-efficient
entity. The major cost and capex synergies would revolve around
network infrastructure, working efficiencies, lower maintenance
expenses, energy cost savings, redeployment of overlapping
equipment from rationalised sites, service centres, back office and
distribution efficiencies, streamlining regional and nationwide IT
systems and evolving to a single IT system besides optimising
costs.

10. Valuation methodology, model and
Swap ratio
¡ MERGER VALUATION & MOTIVATIONS
As per the official figures released by the companies, the expected
value of the new entity post-merger is $23 billion but some analysts
argue that the deal is undervalued by at least 23%.
¡ The companies claim that the merger is largely motivated by their
commitment towards Digital India [8]. Market analysts believe that it
is an essential survival mechanism after the market disruption caused
by Jio, as far as Idea is concerned. Analysts locate Vodafone’s main
aim in its intentions to deconsolidate its Indian operations [9].
¡ DEAL BREAKDOWN
¡ The transaction will start with stock transfer and the deconsolidation
of the Indian operations of V odafone. As part of the deconsolidation
process, Vodafone India will be separated from its parent entity-
Vodafone

11. ¡ Group Plc- and it will be treated as a Joint Venture (JV), reducing Vodafone Group’s
net debt by Rs 55,200 crore [10]. The deal contours can be broken down into the four
steps through which the companies aim to attain share equalisation.
¡ 1. Initial stock transfer: AB Group will acquire 4.9% from Vodafone for Rs 3,874
crore (@ Rs 108/share) to take its stake to 26%, with Vodafone holding 45.1%. The
remaining shareholders of Idea including Malaysia's Axiata, which holds around 20%
in Idea, will see their holding in the new entity diluted proportionately and they will
cumulatively hold 28.9%.
¡ 2. Standstill period of 3 years: Neither company can buy or sell any shares from or
to a third party during the lock-in period. Vodafone has granted a call option on 9.5
percent of its equity without any premium. This enables the AB Group to acquire 9.5
percent of the combined entity’s shares at a pre-determined value of Rs 130 per share
within the next three years.
¡ Selling at market rate in the fourth year: After three years, if AB Group does not
buy any part of the 9.5% equity, Vodafone must give AB Group one last option to
buy it in the fourth year, at the prevailing market price until equalisation is achieved.
¡ Selling down in the fifth year: After four years, if AB Group does not purchase
Vodafone’s shares to equalise the equity holding, the latter must sell it off to a third
party to bring its shareholding on par with AB Group’s shareholding over the next
five years.

12. Valuation Model

13. ¡ MERGER SWAP RATIO
¡ The implied swap ratio is 1:1 and it is based on Idea's price
of Rs 72.5 a unit. The implied enterprise value is Rs 82,800
crore for Vodafone India and Rs 72,000 crores for Idea.

14. ¡ Thanks…...J