Idea-Vodafone merger, helped by Jio's rise, is only good news for customers
One of the major highlights of the week gone by was Vodafone India and Idea Cellular agreeing to merge in a deal valued at $23.2 billion (Rs 1.5 lakh crore). The deal will create India’s largest mobile telephony company with more than 395 million subscribers, 35 per cent of the market share, and 41 per cent of revenue shares.
Although Vodafone global chief Vittorio Colao would like us to believe that the deal was driven by the need to create better infrastructure in the age of data, it goes without saying that the exponential growth of the latest telecom entrant Reliance Jio’s 4G subscriber base (which surpassed the 100-million mark) has been sending shockwaves through the industry and has necessitated this consolidation.
Although Colao stresses that the deal was done “on equal terms”, a section of experts feel it is Idea which has got an upper hand. Proxy firms such as Institutional Investor Advisory Services (IiAS) believe that Vodafone India, a subsidiary of the UK telecom giant, should have dominated the deal, since it is the larger of the two companies.
Vodafone India had 204.69 million subscribers, while Idea Cellular, owned by the Aditya Birla Group, had 190.5 million subscribers in December. India has a total mobile subscriber base of 810 million.
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| Vodafone will own 45.1 per cent of the combined company, Idea will hold 26 per cent, and public shareholders the rest. |
As per the deal, Vodafone will own 45.1 per cent of the combined company, Idea will hold 26 per cent, and public shareholders the rest. Vodafone has allowed the Aditya Birla group a three-year period (the standstill period) to equalise the equity stake, yet allowed it equal voting rights before stake equalisation.
During the standstill period, until equalisation is achieved, 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.
“While this may be conducive to a harmonious merger, it has shortchanged Vodafone plc’s shareholders of their voting rights,” argues IiAS, in an advisory.
Vodafone has also granted a call option on 9.5 per cent of its equity without any premium. A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock at a specified price within a specific time period.
The Aditya Birla group can, within the next three years, acquire from Vodafone upto 9.5 per cent of the combined entity’s shares at a pre-determined value of Rs 130. In case the Aditya Birla group does not acquire this equity, Vodafone will be compelled to sell down its equity stake till it equalises with that of the Aditya Birla group.
“Therefore, if the price of Rs 130 is not attractive, the Aditya Birla group will not exercise its option to purchase equity and Vodafone will have lost the opportunity to encash its holdings,” says IiAS.
Last but not the least, Vodafone will appoint the chief financial officer (CFO), while the board chairmanship has been ceded to Aditya Birla group, and group chairman Kumar Mangalam Birla will be chairman of the new entity.
The CEO and COO selection will be a joint decision. Each will nominate three members to the 12-member board, with the balance six being independents.
Vodafone would not have really minded even if it did not get an upper hand as IiAS argues. Although the second largest mobile telephony firm in India (Bharti Airtel was the largest with 265.85 million subscribers as on December 2016, but will now move to second place, next to the Idea-Vodafone combine), the threat from Jio, driven by the latter’s superior technology and infrastructure, has been simply too big.
And customers of both Idea and Vodafone wouldn’t mind any of these. For them, the deal is a big positive, since it marries the financial muscle of Idea's promoters with the technological edge from Vodafone.
This would lead to better infrastructure, better services and better tariffs for the combined entity, which would hold 1,850 MHz of liberalised spectrum, and will be capable of building substantial data capacity. As the adage goes, all’s well that ends well.
(Courtesy of Mail Today.)