vodafone Idea merger

1. CRITICAL APPRAISAL OF
VODAFONE AND IDEA MERGER
Neha tolani
Amity University

2. ABOUT THE COMPANY: VODAFONE
Vodafone India is a subsidiary of London- based Vodafone Group Plc, the
second largest mobile phone company in the world. Vodafone entered the
Indian market in 2007 by acquiring a 67% stake in Hutchison Essar for
$10.7 billion. The business was owned by Hutchison Whampoa Ltd and
Essar was a minority stakeholder. The company was renamed as Vodafone
Essar and 'Hutch' was rebranded to 'Vodafone’. Vodafone had a right of first
offer (ROFR) vis-à-vis Essar, which it exercised in 2001 to buy out Essar’s
33% stake for $5.46 billion. Vodafone acquired 74% shareholding, which
was later increased to 100% by 2014. The 2007 deal, which secured
Vodafone’s entry into the Indian market is embroiled in a tax dispute.
Vodafone faces the grim prospect of having to meet a huge bill of about
₹14,000 crore, were it to lose the arbitral challenge to the tax claim.

3. Idea Cellular Limited is currently the third largest mobile network operator in
India. It functioned in its early years as a three-way joint venture involving the
Tata Group, U.S. telecommunications behemoth AT&T, and the Aditya Birla
Group (AB Group). Idea was incorporated in 1995 with its registered office in
Ahmedabad. In a decade’s time, the company went public and it was listed in
2007. Idea has been a very successful telecom giant and it has consistently
reported net profits from its services rendered to its 191 million strong
subscriber bases. The company posted its first net loss since listing in 2007 in
the December quarter, hurt by the price war following Jio's offerings].
ABOUT THE COMPANY: IDEA

4. DEAL BREAKDOWN
The transaction will start with stock transfer and the deconsolidation of the Indian operations of Vodafone. As part of the
deconsolidation process, Vodafone India will be separated from its parent entity-Vodafone
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.
3. 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.
4. 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.

5. • MERGER 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.
• INITIAL CONTRIBUTIONS TO THE JOINT VENTURE
• Vodafone will contribute all of its Indian businesses including its standalone towers with
15.8k tenancies but barring its 42% stake in Indus Towers. All of Idea’s assets including
standalone towers with 15.4k tenancies and its 11.15% stake in Indus Towers will vest in
the new entity.
• NET DEBTS
• Idea's net debt was Rs 52,700 crore in December 2016. Vodafone would contribute Rs
55,200 crore of net debt to the merged entity. The combined entity would remain highly
leveraged and will need some form of capital infusion.

6. Reverse merger occurs when a larger company merges into a smaller company. It is commonly adopted for tax benefits
because the smaller company’s relatively smaller tax liabilities alone get carried forward. Popular examples are Godrej
Soaps Ltd.’s reverse merger with loss-making Godrej Innovations Chemical Ltd and ICICI’s merger into ICICI bank.
Reverse merger can also be used as a tool for backdoor listing in Stock Exchange without going for an Initial Public
Offer (IPO). The deconsolidation of Vodafone India and its merger into Idea results in its indirect listing in the National
Stock Exchange (NSE).
Vodafone has an interesting history of indirect listing in the Indian Stock Market. Vodafone Essar was indirectly listed on
the Bombay Stock Exchange (BSE) in 2011 after Essar Telecommunications Holdings (Essar) which held 11%, was
merged with the listed company, India Securities Ltd (ISL). Essar underwent a reverse listing into ISL and became
public.
Vodafone objected to the reverse merger of Essar into ISL since it believed that ISL is illiquid and it did not want its
Indian venture to become a subject of a false market. However, the Madras High Court cleared the merger and rejected
Vodafone’s plea.
The back-door listing of Vodafone Essar happened by virtue of S.43A of the 1956 Companies Act. Under the provisions
of S.43A, a private company in which more than 25% of the paid up share capital is held by body corporates that are not
private shall be deemed to be a public company. The 1956 Act does not create a distinction between body corporates
incorporated abroad and those that are incorporated in India. Hence, the shareholding of the paid-up equity of Vodafone
Essar easily exceeds the 25% limit after Essar was merged with a listed company. Therefore, Vodafone Essar was
deemed public.
LISTING BY WAY OF REVERSE MERGER

7. Vodafone soon bought out Essar’s 33% stake and it was removed from BSE. In 2012, it was planning
to list its Indian operations, but it dropped the idea. By 2014, Vodafone India acquired 100%
shareholding in its Indian venture. In August 2016, Vodafone Group was again preparing to file draft
prospectus for the planned IPO of its Indian business for an estimated $2.5 billion issue, but it did not
materialise .
Finally, Vodafone will enter the Indian stock market through its reverse merger with Idea,
which is a listed company. Additionally, via SEBI Board Meeting of January 14, 2017, further
guidelines were issued to regulate the merger of an unlisted company with a listed entity. It is
mandatory for qualified institutional buyers of the unlisted entity and the public shareholders of the
pre-merger listed entity to own 25% shareholding in the new entity. The listed company must seek
approval from its public shareholders when their voting share is falling more than by 5%, when the
consideration is not in the form of listed shares and the listed company acquires shares in the unlisted
company from its promoters.
Idea is working towards complying with the conditions laid down in the SEBI Board Meeting. The
pricing formula as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (as
amended subsequently) are also being strictly followed. Idea is currently engaged in the process of
obtaining the consent of its public shareholders through e-voting. Once the process is completed, a
compliance report along with the merger scheme will be filed before SEBI and the NSE.

8. STEP-BY-STEP PROCESS INVOLVED IN BACKDOOR LISTING
OF VODAFONE
1. Transfer of 4.9% shares in Vodafone to AB Group. Shareholding of other Idea Shareholders
to be proportionately reduced as per merger ratio to allot shares in the Joint Venture
Company (JVC).
2. Draft Scheme of Arrangement under Sections 230-234 of the Companies Act, 2013.
3. Idea shall obtain a no objection letter from NSE for the draft scheme of arrangement.
4. NSE shall forward the draft scheme of arrangement to SEBI.
5. SEBI shall provide its observations to the draft scheme of arrangement within 30 days and
send it to NSE.
6. Idea shall place the observation letter of the stock exchanges, in the explanatory statement
or notice or proposal accompanying resolution seeking approvals of the Scheme.
7. Idea shall file a draft scheme of arrangement before NCLT obtaining a no objection letter
from NSE, which shall be placed before NCLT.
8. Indirect listing of Vodafone India, which has now merged into Idea to form JVC, occurs.

9. COMMERCIAL CONSIDERATIONS CAPTURING
SYNERGIES
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.

10. FINANCIAL SYNERGY
Financial synergy is created through higher cash flows or through the lowering of the cost of the capital. Vodafone has annou nced 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 synergis tic benefits is expected
to be at around 17% [21].
OPERATING SYNERGY
Operating synergy is created by increase in income through the use of existing assets [22]. 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 cos t savings,
redeployment of overlapping equipment from rationalised sites, service centres, back office and distribution efficiencies, st reamlining regional
and nationwide IT systems and evolving to a single IT system besides optimising costs

11. VALUATION METHODOLOGY
Vodafone has clearly made its Indian operations subservient to its global goals. The world’s second largest company has
invested circa £19 billion over the last three years to increase its coverage in the United Kingdom as part of its ‘Project Spring
program’ [26]. Vodafone has also immersed itself neck-deep in the fixed-line service market in Europe. Vodafone’s forays in UK
and the rest of Europe and its deconsolidation of its Indian subsidiary clearly indicate that after aborted IPOs, two write-downs
and a pending humongous retrospective tax liability, the telecom giant has initiated the final countdown in India.
It is undeniable that the deal is necessary for both parties after the competitive pricing onslaught brought on by RJio. However,
when a corporate marriage is a response to an outside threat and global financial concerns, the scope for adverse
consequences for the parties involved is much higher.
A major beneficiary of consolidation in the sector and the merger of Vodafone and Idea operations is the consumer as the three
top players (Bharti Airtel, Idea-Vodafone and Reliance Jio) will bring in best technology at best prices to retain customers in a
sector where brand loyalty has been diluted by Mobile Number Portability [27].Vodafone and Idea have also announced their
plan to explore flexible business diversification opportunities along the lines of Airtel’s tryst with Wynk app and Airtel Money. The
two companies are also hoping to capitalise on the first mover advantage in the Internet of Things (IoT) market in India by
commercially offering smart cars and connected homes at affordable prices. Vodafone and Idea hope to collaborate with other
investors in implementing their plans for the future so that they can limit exposure and maximise synergistic
capabilities. Only time will tell how much of their hopes and plans will materialise into realities in the coming future.

12. THANKYOU