Vodafone India and Idea Cellular decided to have a merger of equals. Vodafone and the Aditya Birla Group will have joint control of this combined company. The merged entity could be the biggest telecom company in India. It would have nearly 40 crore customers, 35 percent customer market share, and 41 percent revenue market share. Months ago, the entry of Reliance Jio in the market disrupted the operations of other service providers. This merger is a strategic response to Jio's significant move.
What does the deal mean for Idea shareholders? The two companies agreed to merge their operations with a swap ratio of 1:1. This means every Idea share will be exchanged with a new share in the merged company. This suggests that operationally, it is a merger of two equals. However, an independent valuation of the two businesses suggests Vodafone's business is worth more. The assessment suggests Vodafone India's business is worth 82,800 crore, while Idea's business is valued at 72,200 crore. Analysts are positive about a merger of two large companies. In the long-term, such a consolidation could be good for future profit margins.
Why did Idea share price fall? Idea share price went up to 120 from an average of 72.5 when speculation about the deal began. However, Idea's shares fell 14 percent after the announcement of the deal. This is because investors were not clear about the deal despite a detailed announcement. A lot of operational issues have been left unresolved. While Kumar Mangalam Birla has been named the chairman of the merged entity, a new CEO and COO are yet to be appointed. Vodafone will appoint the CFO later. The new management structure is expected to evolve over the next 12–18 months, states Kotak Securities. A good management is essential for investors.
What next? To maintain an equal partnership, Vodafone will have 45.1 percent stake in the combined company. This is after transferring a
4.9 percent stake at 110 per share to Aditya Birla Group for 3900 crore in cash. Birla Group will then own 26 percent of the combined company. The remaining 28.9 percent will be owned by Idea shareholders. The Birla Group will have the right to buy additional 9.5 percent stake from Vodafone over the next 4 years. This is to ensure that both the companies have an equal stake in the new company. Both the companies plan to complete the merger in 2018.