Moneycontrol
Mar 20, 2017 07:53 PM IST | Source: Moneycontrol.com

COMMENT: Why the Voda-Idea marriage is all about a smart pre-nuptial

While in any merger the two parties would ideally like to be equal partners, in a war zone there’s no bravado in leading from the front.

 
 
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It is almost like making a marriage work in war-torn Syria. Vodafone and Idea Cellular have decided to respond to the intense price competition with a merger. Prima facie it looks like both the parties have come up with ingenious financial engineering to limit incremental damage.

The deal values Vodafone at an Enterprise value of Rs 82,800 crore. Given that around Rs 55,200 crore debt from Vodafone will get transferred to the combined entity, the equity value works out to Rs 27,600 crore for 364.5 crore shares to be issued. Hence, our back of the envelope calculation suggests that the implied valuation for Vodafone is Rs 75.7 per share.

What’s the gain for Vodafone?

Vodafone Plc (net loss doubled to €5.1 billion in the six months to 30 September from a year earlier) manages to shift the debt of Rs 55,200 crore to the new entity thereby reducing the group leverage.

It also gets cash of Rs 3,874 crore by transferring a 4.9% stake to Aditya Birla Group – Rs 109 per share as per our calculation, interestingly at a decent premium to the implied deal valuation.

While Idea and Vodafone get to have joint control over appointment of CEO (Chief Executive Officer) and COO (Chief Operating Officer), the exclusive right of Vodafone to appoint the Chief Financial Officer (CFO) is the sign of things to come – Voda the boss and not just a dominant shareholder.

Is it gains all the way for the Aditya Birla Group?

While in any merger the two parties would ideally like to be equal partners, in a war zone there’s no bravado in leading from the front. The smarter guy would rather conserve cash and not be a martyr in the battle field early. That’s exactly what the savvy Birla Group has done.

The cash outgo of the Birlas is restricted to the Rs 3,874 crore  – this should make their foreign partners happy and give the Birlas enough time to see how the telecom landscape unfolds before committing any incremental penny to the business.

There is a call option – Birlas can increase their stake from 26% to 35.5% by buying the same from Vodafone at a pre-agreed price of Rs 130 (total outgo Rs 8,949 cr) over a period of three years post the closure of the deal. Hence, if the consolidation in the telecom sector results in pricing discipline, Birlas can take part in the upside by buying the stake at a fixed price of Rs 130.

If the Birla bosses feel that Rs 130 is too high a price, in the 4th year they can purchase 68.8 crore shares (incremental 9.5% stake) from the market. Further, the agreement also stipulates that none of the parties can do any buying or selling of shares other than the aforesaid transaction in the first three years. So Vodafone will continue to do the heavy lifting of managing the telecom war in the medium term while the Birlas ponder over whether this is the right sector to stay committed.

What if hyper competition in telecom persists?

If Birlas do not increase stake in four years post the completion of the deal, Vodafone also has the option to equalise the stake over the next five years. If the other two competitors in telecom markets have a penchant for inorganic moves and have the necessary wherewithal, it’s not  improbable that both Idea and Vodafone monetise their holding in this newly created entity, thereby paving the way for a true consolidation in the sector.
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