Vodafone deal may require Birlas to pump Rs 25,150 crore into Idea Cellular

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KOLKATA | MUMBAI: The Aditya Birla Group needs to pump in cash to raise its stake in Idea Cellular or the combined entity to have equal rights in a telecom joint venture with UK’s Vodafone Group, analysts said, adding that the Indian conglomerate may have to shell out around $3.5 billion (Rs 25,150 crore) for a structure that could see the two hold 37.5% each. They add that another option is for a strategic investor to buy a portion of the UK telecom major’s stake to reduce it to match the Birla group’s holding.

Meanwhile, parallel talks are believed to be on for major shareholder Axiata to reduce its holdings from about 20% in Idea in favour of the Indian group before any merger, a person familiar with the matter said.

Excluding its 42% stake in Indus Towers, Vodafone India, the country’s No. 2 telco, is valued at close to Rs 50,000 crore, as per analysts, 1.2-1.3 times the third-ranked Idea’s market cap, which was over Rs 39,000 crore at close of trade February 3. The Birla group owns roughly 42% of Idea Cellular. The Vodafone Group is a 100% owner of its Indian unit.

Brokerage HSBC expects “Vodafone Group Plc and Idea’s promoter Aditya Birla Group will end up with 37.5% each” in the merged entity, while analysts at Credit Suisse peg their initial respective shareholdings at 39% each, both on the assumption that the Birlas will infuse sizeable equity capital in the combined entity to level its stake with Vodafone’s. Brokerage Credit Suisse estimates that the Birla group’s requisite equity infusion into the Vodafone-Idea merged entity could range between “$2.39 billion and $3.72 billion, depending on Idea’s stock price”.

SURGING STOCK
The Aditya Birla Group though faces a Catch-22 situation, in that the more its stock price jumps amid ongoing merger talks, the more it would need to cough up to ensure shareholding parity with Vodafone. In a little over two weeks, the Idea scrip has shot up nearly 62% from Rs 67.5 (on January 18) to Rs 109.20 on BSE on February 3.

At Rs 77 per share for Idea, the Birla Group would need to put in nearly $2.4 billion to keep its stake at 39%; at Rs 100, $3.1 billion; at Rs 110, $3.4 billion; and at Rs 120, $3.72 billion, according to Credit Suisse estimates. It added that the high equity infusion may lead to some questioning of “the deal logic from the group’s perspective”.

Idea’s minority shareholders, including Malaysia’s Axiata, analysts said, would own the remaining stake. In case of an initial structure of 39% each, Vodafone and Aditya Birla Group would need to bring it down to 37.5% each to conform to rules which require minority shareholders in a listed entity to hold a minimum 25%.

As per the shareholders’ pact, Axiata has the right to keep its holding at around the current levels, in case of an issue of shares by the Indian telco.

A Vodafone Group Plc spokesman said the company “has nothing further to say at this stage” (beyond the January 30 announcement), and would not be commenting to ET’s queries. Queries to Idea Cellular and Axiata did not elicit a response at press time.

STRATEGIC INVESTOR
Industry insiders added that a strategic investor option could also be on the table to bridge the valuation gap with Vodafone, which has more users and revenue than Idea, which is more efficiently run and has been growing faster. An industry executive added that the advent of a strategic investor would make it easier for the UK company to justify its equal rights merger strategy to shareholders, despite being the larger entity.

Analysts at HSBC suggest that another possible solution could be Vodafone picking up a higher stake but agreeing to let the Birla group have equal control over the merged operation. Brokerage Credit Suisse, however, feels such a pact “would be difficult to justify economically”.

Vodafone and the Birla group said on January 30 that they were in talks to merge Vodafone India, excluding its stake in Indus, and Idea in an allshare transaction that would create the country’s largest mobile phone company by subscribers and revenue market share if the deal goes through. Vodafone also said a merger would be effected through the issue of new shares in Idea to Vodafone, which would result in the UK telco separating its India unit.

Vodafone Group CEO Vittorio Colao subsequently said merger talks with Idea’s promoters were aimed at creating a self-funded Indian joint venture with equal rights to take on the competitive threat posed by Reliance Jio Infocomm, led by India’s richest man, Mukesh Ambani.

Jio’s free voice and data services have already hit market leader Bharti Airtel, which reported a 55% fall in its third-quarter net profit to Rs 504 crore. Vodafone India reported a 1.9% drop in service revenue in the December quarter to Rs 10,556 crore, stung by competitive headwinds. No 3 carrier Idea too is expected to fare poorly in the December quarter, with some analysts estimating its first ever net loss.