2 TELECOM MEGA MERGER
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Stay cautious on Idea, advise analysts
No major gains expected in near term, with things likely to turn worse over the next few quarters; merger benefits at least 12-18 months away
RAM PRASAD SAHU & PUNEET WADHWA
Mumbai/New Delhi, 20 March
espite the merger with Vodafone’s
D India operations which will cre-
ate India’s largest telecom com-
pany, the rough ride will continue for
some more time for shareholders at Idea
Cellular.
Investors should tread with caution, as
the sector has been one of the biggest
wealth destroyers. And Idea isn’t signifi-
cantly different from a long-term
investor’s perspective. The stock, which
listed in March 2007 at ~85 is currently
hovering at around ~98 — a compounded
annual return of under three per cent
(over its IPO price of ~75 a share) that fails
to beat inflation.
The merger will take at least a year
and a half to complete and both compa-
nies will operate as independent entities
till this goes through. Analysts believe
the pricing pressure the industry is going
through will continue for at least the next
two to three quarters, putting pressure
on Idea’s financials.
MAKING OF A BEHEMOTH
The Idea-Vodafone combined
entitywould be the country’s
Idea
largesttelecom operator on
both parameters — subscribers
and revenues. Butthe
Vodafone**
Bharti Airtel
combine would lag the Others
currentmarketleader, Bharti
Airtel, in terms ofprofitability
and average revenue per user
(ARPU). The combined entity
would also startwith a greater
netdebtthan Bharti Airtel’s
supported byrelativelylower
total revenues and ARPU DATA-ARPU
Bharti Airtel would retain the
pole position in terms of
operating profitand revenue
per user. The mostprofitable
and heavydata users itseems
continue to remain loyal to
Bharti Airtel and the
Vodafone-Idea would have to
workhard to chip awaythese
130
high-value users to improve
their profitability.
Gross revenue, net sales, operating profit and net profit are for the last four quarters ending December 2016 as reported by Telecom Regulatory Authority of India;
-COMPILED BYKRISHNA KANT ** Vodafone India net sales Ebitda annualised based on H1FY17 numbers; subscribers as of December 31, 2016; net debt is as of September 2016 quarter
UK firm goes defensive with its India play
The Indian operation will cease to be a
subsidiary of the British parent
DEV CHATTERJEE
Mumbai, 20 March
British telecom giant Vodafone plc
will be hoping to bring an end to the
problems it has faced since it bought
Hutchison out of its telecom ven-
ture in India a decade ago.
Since Vodafone made its $11.1-
billion acquisition of Hutchison’s
operations in 2007 and paid anoth-
er $5.5 billion to buy out the Ruia
stake later, the British company has
seldom made money in its India
operations and has had to take two
large impairments. Last year, it
invested another $7.2 billion, taking
its total investments in India to over
$24 billion.
Apart from buying the stakes,
Vodafone plc invested billions of
dollars to buy spectrum over the
years and, of this, it invested
~20,000 crore, or around $3 billion,
in 2016 alone.
Besides the large investments
that the Indian operations have
demanded, Vodafone has been
entangled in legal battles with the
income tax department with around
$2.5 billion in dispute.
The merger with Idea suggests
that Vodafone is taking a step back
as far as its India plans are con-
cerned. Vodafone plc will hold 45
per cent of the merged entity and
the Indian operation will become an
associate company and cease to be a
subsidiary. In the next four years,
Vodafone plc will sell another 9.5
per cent and reduce its holding to
35.5 per cent.
Vittorio Colao, CEO, Vodafone
Vodafone approached DoT before announcing Idea merger
MEGHA MANCHANDA
New Delhi, 20 March
Vodafone India had started the
process for its merger with Aditya
Birla Group company Idea Cellular
by approaching the department of
telecommunications (DoT) even
before Vodafone Group Chief
Executive Officer Vittorio Colao’s
plane touched down at Mumbai’s
Chhatrapati Shivaji International
Airport.
Vodafone last week approached
the DoT for approval for its proposed
merger with Idea. The approvals
sought were for regulatory clear-
ances under the central govern-
It reported a net loss of ~383 crore in
the December quarter; operating profit
margin fell by a little over 500 basis
points year-on-year, to 25 per cent.
Tirthankar Patnaik, India strategist at
Mizuho Bank, believes it would take
another six to 12 months for pricing to
settle; only then would it make sense to
take a view on this sector.
Not surprising, then, that the stock,
which had spurted 30 per cent since
January, fell nine per cent on Monday.
Analysts ascribe this to profit-booking
after the sharp run-up and the muted
near-term outlook for the sector. The
market was also unhappy with the merg-
er valuation, which pegs the per-share
value at ~72.50 for Idea.
While Idea will face major headwinds
over the next few quarters, a section of
analysts believe investors could make
money over the longer term if the merg-
er benefits are as planned. They say the
company had not been performing well,
barring its eight leadership circles, and
would face immense operational pres-
sure. This would have led to further
GROSS REVENUES*
38,780
32,127
NET SALES
(~/month)
44,664
36,928
201
127
plc, had said the Indian opera-
tions in 2007 had 26 million
customers and a 17 per cent
market share. Since then,
Vodafone has increased its cus-
tomer base to 200 million with
a market share of 22 per cent.
“Today, we handle more data
in India than anywhere else in the
world,” Colao said.
Though statistics support
Vodafone’s growth in terms of cus-
tomer acquisition, the company was
slapped with a tax demand on capi-
tal gains in the transaction with
Hutchison. The transaction was
conducted among offshore entities
of Hutchison and Vodafone.
Hutchison did not pay any tax when
exiting India and left Vodafone
holding the can. By 2016, the tax
demand had shot up to ~14,200 crore
with interest and penalty.
Vodafone moved court against
the income tax department and
received a favourable order in the
Supreme Court in January 2012. But
in a controversial move in May 2012,
the government changed the
income tax law and taxed the trans-
action with retrospective effect. The
matter is pending in an internation-
al arbitration court.
When Reliance Jio entered the
telecom market last September by
offering free voice calls and cheap
data, incumbents, including
Vodafone, were pushed to the wall.
Jio’s investment was a massive ~1.5
lakh crore and in five months it
garnered over 100 million cus-
tomers.
Jio also complained about
ment’s mergers and acquisitions
guidelines, sources said.
Idea on Monday announced its
approval for the amalgamation of
Vodafone India and its wholly
owned subsidiary Vodafone Mobile
Services with the company subject
to approvals by shareholders, credi-
tors, the Securities and Exchange
Board of India, the Reserve Bank of
India and other government author-
ities.
Experts described the merger as
a game changer in the battle against
new entrant Reliance Jio. The com-
bined entity would possess the most
spectrum available with a telecom
company even after the two compa-
straining of the balance sheet.
So, gains from the merger will be mul-
tifold. It would help the combined enti-
ty to report profit in each of the country’s
22 circles, given the subscriber base,
spectrum capacity and access to sub-
SUBSCRIBERS
(~ crore) (in mn)
64,348
57,665
466.3
265.9
204.7
190.5
OPERATING PROFIT
(~ crore) (~ crore)
98,493
35,868
12,987
11,414
Sources: Trai, Capitaline, Idea-Vodafone press release and Motilal Oswal Securities
VODAFONE’S INDIA JOURNEY
2007
BUYS HUTCH’S 67%
STAKE FOR $11.1 BN
2010
I-T DEPARTMENT RAISES
~8,000-CR TAXDEMAND
AGAINST VODAFONE ON
HUTCH DEAL
Vodafone to the Telecom Regulatory
Authority of India, which fined it
~1,050 crore along with Bharti Airtel
and Idea for not providing adequate
points of interconnect to the new
player. The matter is also pending
in court.
Last November, Vodafone took a
^6.3-billion impairment charge on
its Indian operations. This was its
second write-down after 2010.
“It is very hard to compete with
someone who gives stuff for free.
That said, any company that gives
away free stuff is not a company but
a charity,” Colao had said soon after
the impairment. This was after its
$7-billion additional investment in
its Indian subsidiary to buy spec-
trum.
After merger with Idea, Vodafone
plans to deconsolidate its India
operations, its India-related debt
nies shed their incremental air
waves in some circles, an expert said.
Idea and Vodafone will have to
discard incremental spectrum in the
900 MHz and 2,500 MHz bands in
the Gujarat, Maharashtra, Haryana,
Kerala and Uttar Pradesh (West) cir-
cles so that the combined entity does
not breach holding caps imposed by
the Telecom Regulatory Authority
of India (Trai).
It is a win-win situation for both
companies and sends out a message
to the competition that there is a
consolidated player. The merger
would also bring some stability to
the sector, said Rajan S Mathews,
director-general, Cellular Operators’
MUMBAI | TUESDAY, 21 MARCH 2017 1

current levels over the next three years.
TREAD CAREFULLY Giving it enough ammunition to fight the
 Since its listing a decade ago, Idea hasn’t made any money other two big players, Reliance Jio and
for its investors, except for a brief period in April 2015 Bharti Airtel. There will also be huge cost
 The merger will take at least a year and a half to complete
and both companies will operate as independent entities
till then
savings, pegged at $2.1 billion (~13,700
crore) annually, a major boost to operat-
ing profits when the merger (synergy)
benefits start flowing from 2020.
 Analysts said it would take another 6–12 months for pricing Though the combined debt would be
to settle down and only then would it make sense to take a over ~1 lakh crore and net debt to operat-
view on this sector ing profit at 4.4 times on a trailing 12
months period, this is expected to come
 Some analysts believe investors could make money only over
ILLUSTRATION: AJAY MOHANTY
down to three times. The reduction will
the longer term if the merger benefits play out as planned be aided by the synergies and the sale of
 The merger will help the combined entity to report profit in standalone towers of Idea and Vodafone,
each of the 22 circles; its annual capex requirement, pegged as well as Idea’s 11.15 per cent stake in
at about ~15,000 crore (~7,500 crore each for Idea, Vodafone) Indus Towers.
While the combined entity stands to
is expected to come down by 20%
gain, the consolidation should help
 There will also be cost savings of $2.1 billion annually bring back pricing power to the sector.
Says Kunj Bansal, investment head at
scribers in metro cities. Further, the Given the overlap in spectrum capac- Centrum Wealth Management, “The
annual capital expenditure requirement, ity, the merged entity can transfer a consolidation will lead to only three big
at ~15,000 crore (~7,500 crore each for chunk of the voice capacity to serve its players in the telecom sector. As a result,
Idea and Vodafone) is expected to come data network. More, the merged entity is hopefully, after a year of intense com-
down by about 20 per cent, leading to looking at having a combined 3G/4G data petition, the industry will regain its pric-
savings in cash. capacity which is 25 times more than the ing power.”
SUBSCRIBER SHARE BLENDED-ARPU
(%) (~/month)
‘India is not a Jio
16.9 market alone’
Soon after announcing the $23-billion merger between Idea Cellular and Vodafone Group Plc,
41.3
18.2 the latter’s Chief Executive Officer VITTORIO COLAO and Aditya Birla Group Chairman KUMAR
MANGALAM BIRLA spoke to Dev Chatterjee on the rationale, the road ahead for the merged
entity and the negative reaction of Idea shareholders. Edited excerpts:
23.6
188
173
171
NET PROFIT NET DEBT
(~ crore) (~ crore)
96,507
55,928
55,679
504
4,214
NA
Aditya Birla Group Chairman Kumar Mangalam Birla (left) and Vodafone Group CEO
Vittorio Colao, at a press conference to announce the merger of the two telecom
majors , in Mumbai on Monday. Under the deal, Vodafone will own 45.1% of the
merged entity; Aditya Birla Group, majority owner of Idea, will own 26%, while other
shareholders will own the remaining 28.9% PHOTO: KAMLESH PEDNEKAR
The entry of Reliance Jio has Then, how do you sell this
changed the telecom transaction to Idea
May 2012 landscape, leading to shareholders?
INDIACHANGES INCOME consolidation in the sector, Birla: Just look at the numbers
TAXLAWS WITH with Bharti Airtel buying out of the merged entity. We have
RETROSPECTIVE EFFECT Telenor and now Vodafone
VITTORIO COLAO compatibility in assets.
and Idea merging their CEO, Vodafone Vodafone is a dominant player
2016 operations. Do you agree with Group Plc in metro cities, while Idea is a
TAXDEMAND BALLOONS TO this assessment? big player in urban and semi-
~14,600 CRORE Colao: You always talk about KUMAR urban markets. The revenue
Jio. But, what about Bharti MANGALAM market share of the combined
VODAFONE TAKES Airtel? They are the market BIRLA entity would be more than
2011 ^6.3-BILLION IMPAIRMENT leader and a very strong and Chairman, Aditya 40 per cent. The combined cus-
VODAFONE BUYS ON INDIA much bigger player. This is not Birla Group tomer share of the new entity
RUIA’S 33% STAKE FOR a Jio market alone. This is a would be over 30 per cent. We
$5.5 BN very competitive market and hope to play a more aggressive
2017 would continue to remain so. There would and much more significant role in partic-
VODAFONE MERGES ITS be more choice for the customers as we go ipating in Prime Minister Narendra Modi’s
January 2012 OPERATIONS WITH IDEA, TO together, over time, as companies that are Digital India vision.
SCRULES IN FAVOUR OF HOLD 45% STAKE IN MERGED very complementary but have a different
VODAFONE AGAINST TAX ENTITY geographic focus and spectrum will go Vodafone once said India was a jewel in
DEMAND together. We will be present in all circles its portfolio… what do you say about
except J&K and there will not be a single India now?
circle where our market share would be Colao: It’s a bigger jewel and a much big-
worth ~55,200 crore, and list on lower than 10 per cent. ger crown now for Vodafone. India has
Indian bourses. been wonderful for Vodafone in terms of
Vodafone will also receive ~3,900 The shareholders of Idea have not market, brand and the customer point of
crore from the Birlas who will reacted positively to the transaction. The view. It has not been very good in other
increase their stake to 26 per cent. stock is down 9.5 per cent since you made ways, as spectrum has been oversold and
Vodafone also has an option to sell the announcement in the morning on prices are too high. Competition rules were
its 9.5 per cent additional stake in Monday. Do you think the investors have managed in a very erratic way. But, the sit-
the merged entity to the Birlas in not understood the benefits? uation is getting better. We will have five
the next four years at a higher valu- Birla: I think there is some miscommu- players with long-term points of view, with
ation so that both partners hold nication about the price at which the all of us having a lot of spectrum and a lot
equal stakes in the company. Aditya Birla group would buy shares of of capacity. Vodafone would continue to
By reducing its debt and with the Idea from Vodafone. Based on my expe- invest in India and we are not exiting India.
cash received from the Birla group, rience, I have realised that when you have
the Vodafone group’s reported lever- such a large and complex transaction, it Vodafone has an income tax demand on
age will reduce by around 0.3 times takes the markets some time to grasp it. If its acquisition of the Hutch stake. Do you
of net debt/Ebitda. the management has taken hundreds of think this transaction would be
Colao said on Monday the com- hours to effect a scheme like this, it would impacted by this in any way?
pany has the option to sell its 42 per certainly take the markets some time to Colao: This transaction will not be impact-
cent stake in Indus Towers. The Idea understand the transaction. Today’s ed in any way by this. The tax demand is
transaction is expected to be accre- (Monday’s) stock correction is only a made to Vodafone Group Plc and the mat-
tive to Vodafone’s cash flow from knee-jerk reaction. ter is currently under arbitration overseas.
the first full year after completion
of the deal.
Association of India (COAI).
Mathews added the merger A MEGA TIE-UP
opened up avenues for both entities  Vodafone India last week
to raise funds from the market. approached the department of
The Vodafone-Idea merger telecommunications for its nod on
means Bharti Airtel will have to the proposed merger with Idea
relinquish its position as the coun-
 Sources said approvals were sought
try’s biggest telecom company. On
February 23, Bharti announced the for regulatory clearances under the
acquisition of Telenor India in a no- Centre’s M&A guidelines
cash deal, which will see the  The combined entity would possess
Norwegian company leaving the the most spectrum available with a
country because its business had telecom company
become unsustainable. Bharti will
take over the outstanding amount  The Vodafone-Idea merger means
for the spectrum Telenor had Bharti Airtel will have to relinquish
acquired and also its contracts for its position as the country’s biggest
tower leases and infrastructure. telecom company