A

RESEARCH PAPER

ON

MERGER AND AQUISITIONS: A CASE FROM INDIAN TELECOM SECTOR

VODAFONE & IDEA

SUBMITTED BY

Prof. Jignesh Vidani

Assistant Professor – MBA,

Department of Management

Noble Group of Institutions

Junagadh

Jignesh.vidani@ngivbt.edu.in

+91-9723223256

SUBIMITTED TO

The Research Cell

DYPIMS Conference

Pune

Electronic copy available at: https://ssrn.com/abstract=3839444

 MERGER AND AQUISITIONS: A CASE FROM INDIAN TELECOM SECTOR

VODAFONE & IDEA

Abstract

Merger and Acquisitions have always been one of the strategies to enter into the international

market creating a synergy for both the companies. The world market has witnessed a number

of mergers and acquisitions which had the same vision and the objective. Talking about

Indian market which had many mergers and acquisitions in the past and will also is having

many more in the coming future. Taking an example of the Indian Telecom sector where we

had Unitech-Telenor, Hutch-Vodafone and now there is Idea –Vodafone. The case which this

paper will discuss is the case of the merger of Vodafone with Idea. We all are aware that

Vodafone acquired Hutch and entered into the Indian Telecom sector where we saw changes

in its services and advertising campaign from Pug to ZooZoos to love couples to Bala and her

wife to the last one Christmas song. The campaign has always focused on its high network

range as well as best services at a minimal cost. After the 4G network the company’s

campaign also focused on the high speed internet services with exciting data packages at

cheaper rates. As per the deal structure, Vodafone and Aditya Birla Group will hold 50

percent and 21.1 percent respectively in the combined entity. The case will throw light on the

merger of the Vodafone with Idea creating a best synergy effect to capture the market share.

The Case will also highlight major advertising campaigns of the Vodafone and strategy

behind them.

Key Word: Merger, Acquisitions, Advertising Campaign, Zoozoos, Synergy.

Electronic copy available at: https://ssrn.com/abstract=3839444

About Vodafone and Idea

Vodafone India is a 100% subsidiary of Vodafone Group. It commenced operations in 1994

when its predecessor Hutchison Telecom acquired the cellular license for Mumbai. Brand

Vodafone was launched in India in September 2007, after Vodafone Plc. acquired a majority

stake in Hutchinson Essar in May 2007. From a single operation base with 31 million

customers, the company has expanded its operations across the country to cover all 22

telecom circles and service 210 million customers. This journey is a strong testimony of

Vodafone's commitment and success in a highly competitive and price sensitive market. [2]

At Vodafone India, They believe that their customers are at thee heart of everything that they

do. That’s why over 210 million Indians have chosen to stay connected with Vodafone. [2]

They have the knowledge of global best practices along with the deep exposure to local

markets which has made them the leaders in the telecommunications industry. Since

commencing operations in 2007, they have consistently been awarded for the best-in-class

network, powerful brand, unique distribution and unmatched customer service. Whether an

individual or enterprise, their customers always receive world-class services that cater to their

needs. [1]

Idea Cellular is an Aditya Birla Group Company, India's first truly multinational corporation.

Idea is a pan-India integrated wireless broadband operator offering 2G, 3G and 4G services,

and has its own NLD and ILD operations, and ISP license. Idea is one of the top three mobile

operators in India, with annual revenue in excess of USD 5 billion and a revenue market

share of 19%. With nearly 200 million subscribers, Idea ranks sixth in the global rankings of

operators in subscriber terms, for single country operations. [3]

Electronic copy available at: https://ssrn.com/abstract=3839444

In line with the Government’s vision of Digital India, Idea has accelerated its efforts of

building a digital economy. Backed with a pan-India wireless broadband coverage, Idea

forayed into Digital services with the launch of a suite of digital entertainment apps - Idea

Music, Idea Movies & TV and Idea Games. With this the company has begun its

transformation from a pure play mobile operator to an integrated digital services and

solutions provider. Idea will also expand its digital offerings into digital communication,

digital payments, cloud & storage, digital information and many more. [3]

Idea’s pan-India network of over 2.7 Lakhs cell sites covers over 400,000 towns and villages.

The company is further expanding network infrastructure to make high speed mobile

broadband services reach out to a large population of the country. Idea has been rapidly

rolling out 4G network across the country, adding over 1 Lakhs broadband sites in the last 2

years, taking its broadband coverage to over 1.2 Lakhs towns and villages across the country.

Idea has also set up a fibre network of over 1.50 Lakhs kms. [3]

Using the latest in technology, Idea provides world-class service delivery through the most

extensive network of customer touch points, comprising of Idea outlets, call centre, Digital

app (My Idea App.) and social media. Idea’s commitment to providing superior customer

experience has been recognized at various forums. The leading market research firm

Forrester in its ‘Customer Service Index 2016’ has ranked Idea at No. 1 position in customer

service and rated it as “good” - the only wireless service provider to achieve this feat! [3]

Idea has received several national and international recognitions for its path-breaking

innovations in mobile telephony products and services. Idea won the prestigious Voice &

Data Telecom Leadership Awards 2017 under Internet & Broadband Services, Marketing,

Network Security, VAS & Apps and Business Process Innovation categories for various

successful initiatives and deployments in these areas. Idea won the prestigious ET Telecom

Electronic copy available at: https://ssrn.com/abstract=3839444

Award in 2017 for Best Enterprise Mobility Solution. Idea was awarded the Golden Peacock

Award for Corporate Social Responsibility for being the best among the Indian Telecom

Companies for CSR. Idea was recognised as the Best Company of the Year 2015 at India

Business Leader Awards by CNBC and is listed among the Top 25 companies in the Business

Today ‘Best Companies to Work For’ Survey. Idea MD Himanshu Kapania was awarded the

Best CEO of the year 2015 by Business Today. [3]

Vodafone – Idea Merger: Story behind the stage

Sushil Agarwal, group CFO and Kumar Birla's consigliere, along with Saurabh Agarwal,

investment banking rain maker turned-Birla's strategy head, and Ashish Adukia, also a

former banker who changed stripes to join the conglomerate as its corporate finance and

M&A head, flew from Mumbai to London to the Vodafone Group headquarters to kick start a

merger conversation that was seeded last summer but had petered out. [5]

Waiting for them on the other side of the table was another seasoned banker — Pierre Klotz,

a former HSBC and UBS veteran who heads M&A at the world's second-largest telecom

company, along with his team. [5]

Both sides knew the negotiations would be intense before a result could be achieved even as

the dynamics of the competitive industry were changing faster than anyone had ever foreseen.

Only a "mother of an idea " could have salvaged the day. [5]

Ever since Mukesh Ambani's, Reliance Jio Infocomm stormed the market with free voice and

data services last September and undermined industry revenue, the only way out was to join

forces and consolidate. [5]

Electronic copy available at: https://ssrn.com/abstract=3839444

Anil Ambani's Reliance Communications had already teamed up with Aircel and an alliance

between the country's No. 2 player, Vodafone, and the third-largest, Idea, seemed the only

logical way out. [5]

One of the official talking to the media quoted that though Vodafone and Idea had flirted in

2016, the talks actually turned serious around the beginning of this year. Adding to it he

further quoted that getting the deal construct right was absolutely essential this time around.[5]

Both companies had, on their own, explored buying or merging smaller operations or assets

like spectrum from Norway's Telenor or Videocon, but those talks never fructified. In any
[5]
case, these were puny operations; what was needed was grandiose.

Joining of the Equals

It's never easy when you are trying to combine and create an operation bigger than AT&T's.

More so, when one is bigger than the other. Most back-of-the-envelope calculations had
[5]
estimated Vodafone India to be worth $3 billion more than Idea, including debt.

Both sides also had their conditions to make the deal value-accretive for their own set of

shareholders. To begin with, it had to be a merger with equal rights. [5]

Birlas wanted a minimum 26% in the combined entity and a chairmanship for Kumar Birla.

Vodafone too wanted to deconsolidate its Indian operations. Having invested over $30 billion

in India since 2007, its experience has been rocky, hamstrung with retrospective tax charges

and write-offs. It was also toying with an initial public offering (IPO) for its India operations,

so cherry-picking the right strategy to grow in a market like India was absolutely critical. [5]

The initial plan was to merge the two wireless operations, like RCom and Aircel, but it wasn't

practical and was rejected. To make the 50:50 Joint Venture work, it only made sense if

Vodafone kept its 42% stake in Indus Towers out of the deal while Idea's standalone towers

Electronic copy available at: https://ssrn.com/abstract=3839444

and 11% shareholding in Indus were brought into the combined entity. Both have been

looking to reduce exposure to tower assets, including selling stakes in the joint venture

independently, and have said they still plan to do so before the merger gets consummated. [5]

Talking to the media one of the official quoted that the construct took time and followed 4-5

days of intense brainstorming between Mumbai and London. But once that was settled, the

rest fell into place quickly. The intent was very clear and if one had to meet all the pre-

conditions, there were not too many choices available in the first place and both the

operations also got valued at the same multiple. The financial gap between the two has been

shrinking in the past few months. There is only a 10% gap in EBITDA (earnings before

interest, tax, depreciation and amortisation) between Idea and Vodafone. Of the two, Idea has

been growing faster and its margins have also improved significantly. So it wasn't all that

tough. [5]

But it was tough to keep everything under wraps. Media leaks in the UK and India in mid-

January had forced both sides to make a joint statement by the end of the month,

acknowledging the ongoing talks. It was then that the plot thickened on the back of "really

aggressive timelines. Between Mumbai, London, Dubai and Abu Dhabi, the core team met a

little over half a dozen times to stitch it all up. [5]

They have seasoned in-house bankers on both sides. It was left to them to dot the I's and cross

the t's like infrastructure and manpower duplication, among other things. [5]

Both Pierre and Saurabh have been seasoned telecom bankers and having worked on several

such transactions are fully aware of the sectoral issues. Adukia too is no stranger to M&A.

No wonder, Birlas did not engage any outside bankers. Vodafone always does most of the

initial work in-house and only then gets advisers on board. This was no exception.

Once the overall construct was agreed upon, both sides engaged external advisers — Morgan

Electronic copy available at: https://ssrn.com/abstract=3839444

Stanley, UBS, Robey Warshaw, Bank of America Merrill Lynch, Kotak Investment Bank and

Rothschild; lawyers S&R Associates, Slaugter and May — to begin work on documentation.

From February, the operations team from both the telcos were roped in and due diligence

began. [5]

Operationally, both sides had already been busy taking stock. On March 15, the Vodafone

India brass met along with Vivek Badrinath, CEO (AMAP) and executive committee member

of Vodafone Group, to review the state of preparedness and other operational issues with

regard to the integration. The following day, the Vodafone India board met in Mumbai to

further discuss the merger. [5]

Vodafone – Idea Merger: The Counter stroke

After Idea Cellular Ltd and Vodafone India Ltd announced that their respective boards have

approved the merger, as discussed in the meeting both companies will have equal stake in the

merged entity, over a period of time was quoted by the respective chiefs of Vodafone and

Idea. [4]

The merger would exclude Vodafone’s 42% stake in Indus Towers Ltd, to create India’s

largest telecom company with total revenue of over Rs 80,000 crore. [4]

As per the PTI report, Kumar Mangalam Birla would be the new chairman of the merged

entity, while Vodafone will appoint its Chief Finance Officer. [4]

In the beginning, Vodafone will be a dominant partner in the merged entity with 45.1% stake

after it will transfer a stake of 4.9% to the Aditya Birla group for Rs 3,874 crore in cash to

complete the merger. Aditya Birla group will then own 26% stake in the company but it will

Electronic copy available at: https://ssrn.com/abstract=3839444

have the right to acquire more shares from Vodafone under an agreed mechanism with a view

to equalize the shareholding over time. [4]

Kumar Mangalam Birla, the chairman of the Aditya Birla Group, quoted in one of the speach

that for Idea shareholders and lenders who have supported us thus far, this transaction is

highly accretive, and Idea and Vodafone will together create a very valuable company given

the complementary strength from Idea. [4]

Idea Cellular in a regulatory filing said that, the Board of Directors have approved the scheme

of amalgamation of Vodafone India Limited and its wholly owned subsidiary Vodafone

Mobile Service Limited with the company (Idea). [4]

Vittorio Colao, Chief Executive, Vodafone Group said to the media that the combination of

Vodafone India and Idea will create a new champion of Digital India founded with a long-

term commitment and vision to bring world-class 4G networks to villages, towns and cities

across India. The combined company will have the scale required to ensue sustainable

consumer choice in a competitive market and to expand new technologies - such as mobile

money services - that have the potential to transform daily life of every Indian. [4]

The combined company would become the leading communications provider in India with

almost 400 million customers, 35% customer market share and 41% revenue market share.

However, the brand strategy and the name of the new merged company will be developed in

due course.[4]

Electronic copy available at: https://ssrn.com/abstract=3839444

Concluding Remarks

The business that is not important, but the strategy used to become the market leader is the

most important. Both the companies Idea and Vodafone used this counter strategy to beat the

strategy of Reliance Jio in the Indian telecom market. The only thing that is been expected by

this merger is that it should create the effect for which it was undertaken. The company

should have undergone more financial analysis as the tax credit of Vodafone is much higher.

But Birla’s are no more lacking behind the strategy part.

References

1. https://www.vodafone.in/about-us/home?section=consumer

2. https://www.vodafone.in/about-us/company-history?section=consumer

3. http://www.ideacellular.com/aboutus/aboutidea

4. http://www.hindustantimes.com/business-news/merged-idea-vodafone-will-become-india-s-

largest-telecom-company/story-RMYbroj4roUPOB43wvAmdI.html

5. https://economictimes.indiatimes.com/news/company/corporate-trends/the-behind-the-scenes-

story-behind-voda-idea-mega-merger/articleshow/57741745.cms

Electronic copy available at: https://ssrn.com/abstract=3839444