Although it's a remote possibility, even an open offer happens, there is limited upside for investors.
In March, Vodafone and Idea decided to join hands to take on intense competition. The parties engineered an ingenious financial deal to limit incremental damages. The contours of the deal ensured that there would be no change in the control in the combined entity.
However, recent reports suggest that the markets regulator is scanning through the documents and should it interpret that there is a change in control, it might trigger an open offer under the takeover code. We argue that although that’s a remote possibility, even if it happens, there is limited upside for investors.
As per the deal structure, Vodafone and Aditya Birla Group will hold 50 percent and 21.1 percent respectively in the combined entity. Later, Vodafone will transfer 4.9 percent of its stake at a pre-agreed price of Rs 109 per share to AB Group, bringing its stake down to 45.1 percent.
Additionally, the Birlas have a call option wherein they can increase stake by 9.5 percent to reach 35.5 percent at a pre-agreed price of Rs 130 per share over a period of three years post the closure of the deal.
The Birlas also have the option of picking up the stake from the market in the fourth year. If they do not exercise that option of raising their stake, then Vodafone has the option of reducing its stake to equalise ownership with that of AB Group.
“From the control of combined entity perspective, Kumar Mangalam Birla will be the chairman while Idea and Vodafone get to have joint control over appointment of CEO (Chief Executive Officer) based on merit and COO (Chief Operating Officer). Vodafone has the exclusive right to appoint the Chief Financial Officer (CFO),” said Shobhit Khare, Co-Founder, Inertia Wealth Creators LLP, who tracked telecommunication sector at Motial Oswal previously.
Upside in case of an open offer
However, if SEBI’s examination of documents leads to an open offer by AB Group under the takeover code, then “the open offer would be at the price close to Rs 109 per share,” said SP Tulsian of sptulsian.com.
There are two conditions that trigger an open offer - the acquisition of 25 percent or more shares of the target company by the acquirer company and the change in the ownership. Since none of these conditions is getting fulfilled in Vodafone–Idea merger, the probability of open offer event is low.
Should this happen, the upside is limited to 24 percent for investors from the current share price of Idea of Rs 88 per share.@Agrawant