Idea not to bid for more spectrum

The merged entity’s spectrum holdings would be 1800 MHz. Of this, the merged entity would deploy 400 MHz of spectrum for voice services while the remaining 1400 MHz would be deployed for data. This will help increase data capacity by 25 to 50 times, said Kapania.

Even if spectrum auctions are held before the two entities merge, Idea will not participate in any spectrum auction as it will have the largest spectrum holdings after the merger. The need for capex too will come down following the merger, as will operational expenditure.

Of the 280,000 sites between Vodafone and Idea, there is an overlap of 20 percent. However, since the company intends to increase its data capacity substantially, it may not rationalize all the co-location sites.

Idea’s management conveyed that the merged entity expects synergy benefit of USD 2.1 billion in the first four years of the merger itself. Of this, 60% would be through savings in operational expenditure and remaining 40% would be through capex savings.

Added Kapania: “There are two big synergy areas – complimentary footprint and consolidating spectrum.” Given that Vodafone has a strong urban footprint and Idea is strong in semi urban markets, the network rollout costs for both would be less given that the merger is complimentary.

He said revenue visibility for the next 12-18 months remained challenging, but expected the sector to return to double digit growth after FY19 once Jio completed a full year of charging for its services. The management is hopeful of completing its monetization plans and that would lower net debt/EBITDA to 3-4 times.

The combined entity has a debt of Rs 1.07 lakh crore, which Kapania says is sustainable if the monetization targets are met.

The management team of Idea said that a sign of confidence in the sector came from the promoters who were willing to acquire 4.9 percent of Vodafone’s stake at Rs 110/share.

The payout of Rs 3,900 crore by the Aditya Birla Group implies a valuation of the merged entity’s enterprise value/EBITDA of 7.7 times trailing twelve months. So while the promoters are diluting at a valuation of 6.4 times they are again acquiring Vodafone’s stake at a higher valuation.

And within the three years of the merger, Aditya Birla Group can acquire another 9.5 percent stake in the merged entity at Rs 130/share, which is higher than the price at which the current deal is being done. This assumes significant confidence in the sector and the business.

Commenting on the deal’s valuation and if it was at Rs 72/share, Mr. Saurabh Agarwal, Chief Strategy Officer of the Aditya Birla Group, said the existing share count would double after fresh shares were issued to Vodafone since it was a structured as merger. He explained: “The valuation comes out with a ratio. The recommendation by joint valuer was a 50:50 merger. The mobile businesses have been valued at a similar valuations.”

One of the key concerns that analysts had was how would the merged entity bring down market share down in circles where it was breaching the 50 percent permitted mark. There are six circles where the combined revenue market share of both Idea and Vodafone is over 50 percent.

Kapania said: “We believe at this point of time the revenue of Jio is not factored in. We are looking at full fiscal FY19 to see adjustment of Jio’s revenue come in. The bigger picture is that there are six markets where we are together over 50 percent. But in nine markets we have scale in these markets where our RMS goes to 20-22 percent.”