Mumbai - Vodafone Group agreed to merge its Indian unit
with Idea Cellular to create a leader in the world’s second-largest mobile
phone market.
Vodafone Group, which owns a majority stake in SA’s
Vodacom, and Idea Cellular will initially equally own the venture. The European
carrier will control 45.1 percent of the combined company after selling a 4.9
percent stake in the new entity to billionaire Kumar Mangalam Birla’s holding
companies, according to a stock exchange filing Monday. Birla’s companies will
take a 26 percent holding, with the remainder being held by the public.
The enlarged wireless operator would have 395 million
subscribers, exceeding those of market leader Bharti Airtel. The transaction
will help Vodafone unload an unprofitable business that has prompted it to
announce $12 billion of additional investment and writedown to fight
competition from billionaire Mukesh Ambani’s start up.
The new company is worth $23.2 billion, based on the
combined enterprise value of $12.4 billion for Vodafone India and $10.8 billion
for Idea Cellular. The Birla companies will pay 108 rupees ($1.7) apiece for
the 4.9 percent stake in the merged entity, Saurabh Agarwal, head of strategy
at the group, said at a press conference in Mumbai. The companies will have to
pay 130 rupees a share if they want to raise their stake in the first three
years and pay the market price in the fourth year, he said.
Shares of Idea Cellular fell 7.6 percent to 99.90 rupees
as of 1:26 p.m. in Mumbai, after initially surging as much as 15 percent.
Bigger scale
The merger will help better utilize spectrum and the
combined entity will have complementary footprint across India, Vodafone Group
Chief Executive Officer Vittorio Colao said at the press conference. The deal
gives higher return to shareholders due to the bigger scale of the new entity,
he said.
The combined entity will need to reduce spectrum it holds
in a few regions to meet regulatory norms, said Colao. The excess airwaves will
either be sold or returned to the government if they can’t find a buyer, he
said.
Vodafone and Idea will each control three seats on the
board of the new company, which in addition will have six independent
directors. Birla will have the right to appoint a chairman.
Read also: Vodafone down on Indian competition
Vodafone would gain a listing in the world’s second-largest
wireless market, which it has been considering since at least 2011. Idea’s
promoters will buy the 4.9 percent stake in the merged entity for 38.74 billion
rupees ($592 million) in cash, on completion of the transaction.
The latest transaction is expected to be completed in
2018, according to the statement. It’s the biggest deal to emerge after
Ambani’s Reliance Jio Infocomm Ltd. stormed into the market last year by
offering free calls and data, pressuring other carriers to consolidate.
Intense competition
Last month, Bharti agreed to acquire Telenor ASA’s Indian
business. The Norwegian state-controlled carrier said at the time that
prospects for the industry didn’t warrant further investments.
The competition among the different carriers will continue
as they fight for market share in data, according to Rajan S. Mathews, the
director general of Cellular Operators Association of India.
“Now everybody is competing very aggressively for data
share and that means there will be continued pressure on prices,” said Mathews.
“Increasingly, operators will start looking to future opportunities like
Internet of Things and cloud computing, and begin to focus on these to augment
their revenues and profitability.”
Birla units, including Aditya Birla Nuvo, own 42 percent
of Idea, according to the company’s website. Malaysian carrier Axiata Group Bhd
has a 20 percent stake. Vodafone India is a wholly owned unit of Vodafone.
In the quarter ended December 31, Idea reported its first
loss for the group in about a decade. Idea reduced its voice calling rates by
11 percent and mobile data rates by 15 percent from the previous quarter. Free
calls and data offered by Reliance Jio also reduced data consumers on its
network.