The Department of Telecom gave conditional nod for merger of these companies on July 9.
Inching closer to formation of country's biggest telecom operator, Idea Cellular and Vodafone have made joint payment of Rs 7,248.78 crore under protest to the Department of Telecom for merging their mobile business. People in the know have said the payment has been made "under protest" and that the new combined entity has the option of challenging the dues sought in court later.
"Idea Cellular and Vodafone have made payment under protest as demanded by the DoT for the merger. Rs 3,926.34 crore have been paid in cash and bank guarantee of Rs 3,322.44 crore have been furnished," an Idea Cellular official confirmed the development.
The Department of Telecom gave a conditional nod for merger of these companies on July 9 and asked companies to meet the demand raised for taking merger on record.
The combined operations of Idea and Vodafone – called Vodafone Idea – will create the country's largest telecom operator worth over $23 billion (or over Rs 1.5 lakh crore), with a 37.5 percent market share and a subscriber base of around 438 million (39 percent customer share).
While Kumar Mangalam Birla-owned Idea has given bank guarantee on account of one-time spectrum charges, the UK-headquartered Vodafone India has given cash towards market price for non-auctioned airwaves held by India’s second-largest operator.
The merger is expected to give a breather to both debt-ridden firms Idea and Vodafone, from cut-throat competition in the market where margins have hit rock bottom with free voice calls.
It will have the capacity to provide 4G spectrum in all telecom circles of the country. According to a presentation by Idea, the combined 4G spectrum of both the companies is capable of offering up to 450 megabits per second broadband speed on mobile phones in 12 Indian markets.
With the new entity coming in force, Bharti Airtel will lose the tag of India's biggest telecom service provider to the new entity. With the new entity in place, the telecom race will be a three-way one, with the latest disrupter Reliance Jio at bronze medal position. But the elevation to 20 percent market share by Jio has only been in a matter of 18 months.
Recently, Bharti Airtel (India) CEO Gopal Vittal had said that the telecom sector was set to have just three big players holding similar market share. If that theory holds, Vodafone Idea could lose some market share as Airtel and Jio are expected to continue to exert pressure on margins. The combined debt of both the companies – Idea and Vodafone India – is estimated to be around Rs 1.15 lakh crore.
Vodafone will own a 45.1 stake in the combined entity, while Kumar Mangalam Birla-led Aditya Birla Group would have 26 percent and Idea shareholders 28.9 percent.
The Aditya Birla Group has the right to acquire up to a 9.5 percent additional stake from Vodafone under an agreed mechanism with a view to equalising the shareholdings over time.
If Vodafone and the Aditya Birla Group's shareholdings in the combined company are not equal after four years, Vodafone will sell down shares in the combined company to equalise its shareholding to that of the Aditya Birla Group over the following five-year period.
Until equalisation is achieved, the voting rights of the additional shares held by Vodafone will be restricted and votes will be exercised jointly under the terms of the shareholders' agreement.
Earlier this year, the companies had announced a restructuring of the leadership team for the merged business that would have Kumar Mangalam Birla at the helm as non-executive chairman. Vodafone insider and current chief operating officer (India) Balesh Sharma will be CEO of the merged entity.
According to analysts, any further delay could have cost the debt-ridden firms heavily. Recently the Vodafone and Idea teams had a brainstorming session together – the first of its kind ahead of the merger – which also seems to indicate the hurry the companies seem to be in to get the merger rolling.
The companies were hoping to complete the merger by the end of June but the process has already been delayed by a month thanks to the conditional nod offered by the DoT.
The process now is that the DoT will issue its final letter of approval and will transfer Vodafone India's licenses to Idea Cellular. The DoT will also start transferring Vodafone's bank guarantees for deferred spectrum payments to Idea.
The path to the merger has now taken well over a year. It was in March 2017 that Vodafone India and Idea Cellular announced the merger. CCI green-lighted the companies to join operations in July of 2017. And a month later, SEBI and bourses gave the nod to the union. NCLT, earlier this year in January, approved the merger.
Anyone remember the line "Should anyone here present know of any reason that this couple should not be joined in holy matrimony, speak now or forever hold your peace"? Well, DoT raised its hand earlier in July and made the 72 billion rupee demand at the last hurdle. And it appears now that the last hurdle has been cleared.
The stock market has given its blessings too, it would appear.
Idea Cellular share price surged almost 16 percent to hit an intraday high of 61.3 rupees. The scrip closed at 56.5 rupees – about 7.1 percent up.
ET quoted Prashant Singhal, telecom, media, and technology leader for emerging markets at EY, as saying, "It's the right thing to do in current circumstances — since every delay in the merger could have a time value impact. Finally, India is a 3+1 operator market from an almost nine operator market 24-30 months ago."
Sanjiv Bhasin, Executive Vice President, Markets, and Corporate Affairs at IIFL said, "The payments will now ensure that the merger goes through. It will have its own economies of scale, it will have a lot of tax benefits, claim much more depreciation, so the accounting positives will come in. Given that (Idea) stock was trading at an all-time low of Rs 50, this will be a shot in the arm in the near term."
Commenting on the three-way race that the telecom sector is now going to be, Bhasin added, "Now, it will be a three-pronged attack with Jio, Airtel, and Idea-Voda, where all three are capable of raising money. So, overall, the worst may be over and over time as prices stabilise, you could see Idea-Vodafone also report better average revenue per user (ARPU) and profitability in the next three to six quarters. There is enough room for all three to survive. At Rs 350 for Bharti Airtel and Rs 50 for Idea, all the negatives have been priced in."
What will be the next moves of Bharti Airtel and Reliance Jio? Whatever they may be, it will certainly make for an interesting show. Jio is not content being bronze medalist. The months ahead in the Telecom Wars will certainly be intriguing, and who runs the longest, and who makes the longest distance call now comes with an (almost) even chance.Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.