Journal of Corporate Governance and International Business Law

Volume 2, Issue 1
www.stmjournals.com

Analysis of A Corporate Transaction: Merger of Vodafone

India & Idea Cellular
Lakshana R*
Scholar, Nalsar University of Law, Hyderabad, Telangana, India

Abstract
The Indian telecom industry has been in the grip of consolidation ever since the trading of
spectrum licenses was legalised in October 2015. In the interest of increasing competition,
innovation and facilitating businesses, the Department of Telecommunications (DoT)
liberalised the spectrum and allowed telecom companies to transfer their airwaves rights, subject
to certain restrictions. Recently, Vodafone and Idea announced a merger that will create India’s
largest telecom operator with more than 400 million subscribers and fuel the ongoing market
consolidation. The merger will result in Indian telecom sector being dominated by four players-
Vodafone-Idea, Bharti Airtel, Jio and BSNL. It will also kick-start the process of renewing price
discipline in an industry, which is still reeling under the shock of Jio's disruptive entry. The aim of
this paper is to provide a detailed analysis of the Vodafone-Idea mega deal. The following section
contains a brief note on the two telecom giants. The third part deals with the contours of the
merger. The fourth part provides an analysis of certain legal aspects of the deal and it is followed
by a study of the significant commercial elements involved in the transaction. The conclusion sums
up the discussion with a note on the potential future trajectory of the new entity.

Keywords: Vodafone, Idea, merger, telecom, spectrum and consolidation

*Author for Correspondence E-mail: lakshana@outlook.in

INTRODUCTION Recently, Vodafone and Idea announced a

The Indian telecom industry has been in the
grip of consolidation ever since the trading of
spectrum licenses was legalised in October
2015. In the interest of increasing competition,
innovation and facilitating businesses, the
Department of Telecommunications (DoT)
liberalised the spectrum and allowed telecom
companies to transfer their airwaves rights,
subject to certain restrictions [1]. Videocon
Telecommunications took the lead and
monetised its spectrum rights by selling it to
Idea in several circles soon after the
liberalisation move [2]. Market consolidation
in the telecom industry is not peculiar to India.
In the United States, DirectTV was acquired
by AT&T to reduce customer churn and new
customer acquisition costs. As market players
chose to offer quad-play services to customers,
consolidation became the most efficient option
in the saturated US mobile phone market. In
Europe, Iliad-Telefonica-Hutchison have come
together to synergise their operations and
consolidate the quad-play market in Italy [3].
merger that will create India’s largest telecom
operator with more than 400 million
subscribers and fuel the ongoing market
consolidation. The merger will result in
Indian telecom sector being dominated by four
players- Vodafone-Idea, Bharti Airtel, Jio and
BSNL. It will also kick-start the process of
renewing price discipline [4] in an industry,
which is still reeling under the shock of Jio's
disruptive entry.
COMPANY BACKGROUND
Vodafone
Vodafone India is a subsidiary of London-
based Vodafone Group Plc, the second largest
mobile phone company in the world.
Vodafone entered the Indian market in 2007
by acquiring a 67% stake in Hutchison Essar
for $10.7 billion. The business was owned by
Hutchison Whampoa Ltd and Essar was a
minority stakeholder. The company was
renamed as Vodafone Essar and 'Hutch' was
rebranded to 'Vodafone’. Vodafone had a right

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Analysis of A Corporate Transaction
of first offer (ROFR) vis-à-vis Essar, which it
exercised in 2001 to buy out Essar’s 33%
stake for $5.46 billion. Vodafone acquired
74% shareholding, which was later increased
to 100% by 2014. The 2007 deal, which
secured Vodafone’s entry into the Indian
market is embroiled in a tax dispute. Vodafone
faces the grim prospect of having to meet a
huge bill of about ₹14,000 crore, were it to
lose the arbitral challenge to the tax claim [5].
Idea
Idea Cellular Limited is currently the third
largest mobile network operator in India. It
functioned in its early years as a three-way
joint venture involving the Tata Group, U.S.
telecommunications behemoth AT&T, and the
Aditya Birla Group (AB Group). Idea was
incorporated in 1995 with its registered office
in Ahmedabad. In a decade’s time, the
company went public and it was listed in 2007.
Idea has been a very successful telecom giant
and it has consistently reported net profits
from its services rendered to its 191 million
strong subscriber bases. The company posted
its first net loss since listing in 2007 in the
December quarter, hurt by the price war
following Jio's offerings [6].
TRANSACTION DETAILS MERGER
VALUATION & MOTIVATIONS
As per the official figures released by the
companies, the expected value of the new
entity post-merger is $23 billion but some
analysts argue that the deal is undervalued by
at least 23%. [7]
The companies claim that the merger is largely
motivated by their commitment towards
Digital India [8]. Market analysts believe that
it is an essential survival mechanism after the
market disruption caused by Jio, as far as Idea
is concerned. Analysts locate Vodafone’s main
aim in its intentions to deconsolidate its Indian
operations [9].
DEAL BREAKDOWN
The transaction will start with stock transfer
and the deconsolidation of the Indian
operations of Vodafone. As part of the
deconsolidation process, Vodafone India will
be separated from its parent entity-Vodafone
JoCGIBL (2019) 1-9 © Law Journals 2019. All Rights Reserved
Lakshana R
Group Plc- and it will be treated as a Joint
Venture (JV), reducing Vodafone Group’s net
debt by Rs 55,200 crore [10]. The deal
contours can be broken down into the four
steps through which the companies aim to
attain share equalisation.
1. Initial stock transfer: AB Group will
acquire 4.9% from Vodafone for Rs 3,874
crore (@ Rs 108/share) to take its stake to
26%, with Vodafone holding 45.1%. The
remaining shareholders of Idea including
Malaysia's Axiata, which holds around
20% in Idea, will see their holding in the
new entity diluted proportionately and
they will cumulatively hold 28.9%.
2. Standstill period of 3 years: Neither
company can buy or sell any shares from
or to a third party during the lock-in
period. Vodafone has granted a call option
on 9.5 percent of its equity without any
premium. This enables the AB Group to
acquire 9.5 percent of the combined
entity’s shares at a pre-determined value
of Rs 130 per share within the next three
years.
3. Selling at market rate in the fourth
year: After three years, if AB Group does
not buy any part of the 9.5% equity,
Vodafone must give AB Group one last
option to buy it in the fourth year, at the
prevailing market price until equalisation
is achieved.
4. Selling down in the fifth year: After four
years, if AB Group does not purchase
Vodafone’s shares to equalise the equity
holding, the latter must sell it off to a third
party to bring its shareholding on par with
AB Group’s shareholding over the next
five years.
BOARD COMPOSITION & VOTING
RIGHTS
Vodafone will appoint the Chief Financial
Officer (CFO) and Kumar Mangalam Birla
will be the Chairman of the Board. The CEO
and COO will be chosen upon mutual consent
before the closure of merger. The promoters of
Idea and Vodafone will have the right to
nominate three members each on the board,
which will have 12 directors, six of whom will
be independent.
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Journal of Corporate Governance and International Business Law
Volume 2, Issue 1
AB Group and Vodafone will exercise their
votes jointly and the voting power of
Vodafone will be proportionately reduced until
share equalisation is achieved
MERGER RATIO
The implied swap ratio is 1:1 and it is based
on Idea's price of Rs 72.5 a unit. The implied
enterprise value is Rs 82,800 crore for
Vodafone India and Rs 72,000 crores for Idea.
INITIAL CONTRIBUTIONS TO THE
JOINT VENTURE
Vodafone will contribute all of its Indian
businesses including its standalone towers
with 15.8k tenancies but barring its 42% stake
in Indus Towers. All of Idea’s assets
including standalone towers with 15.4k
tenancies and its 11.15% stake in Indus
Towers will vest in the new entity.
NET DEBTS
Idea's net debt was Rs 52,700 crore in December
2016. Vodafone would contribute Rs 55,200
crore of net debt to the merged entity. The
combined entity would remain highly leveraged
and will need some form of capital infusion.
BREAK-FEE
The merger agreement has a break-fee of Rs
3,300 crore payable under certain
circumstances.
LEGAL ISSUES REGULATORY
HURDLES- TRAI
The new entity will face regulatory challenges,
largely concerning transfer of allocated
airwaves and exceeding spectrum holding and
market share limits in six circles each. The
combined entity will exceed revenue market
share limits of 50% in Gujarat, Haryana,
Kerala, Maharashtra, Madhya Pradesh and
Uttar Pradesh (West). The new entity will
exceed spectrum caps in six circles [11].
The Mergers & Acquisition Guidelines
released by the DoT in February 2014 [12]
provides certain conditions that must be met
before approval can be given for merger of
telecom companies. With regard to
overshooting market share limits and
breaching the caps on spectrum holding post-
JoCGIBL (2019) 1-9 © Law Journals 2019. All Rights Reserved
merger, the Guidelines mandate that the
merged entity must fall in line within a year of
closing.
Approval of the TRAI is required before the
license held by the merging entities can be
subsumed in the resultant entity. Within 30
days from the filing of merger application
before the National Company Law Tribunal
(NCLT), the companies must file an
application before the licensor. Paragraph 3(g)
of the Guidelines provides that spectrum in
excess of 50% in any circle in which the entity
has a minimum 50% market share must be
reduced. There are two ways of diminishing
the spectrum held. The merged entity can
choose to surrender it to the TRAI without a
refund or it can transfer it to a rival company.
Both Idea and Vodafone will have to reduce
excess spectrum in the 900 MHz and 2500
MHz bands across Gujarat, Maharashtra,
Haryana, Kerala and Uttar Pradesh (West)
circles so that the combined entity does not
breach the spectrum holding cap. Spectrum
liberalisation costs are expected to have a Net
Present Value (NPV) impact of approximately
Rs 3,000 crore. The new entity would hold
1,850 MHz spectrum. Around 1,645 MHz of it is
liberalised spectrum acquired via auctions and the
rest of it was allotted to the company without
auctions so the company will have to pay market
fee for it [13].
Bharti Airtel can capitalise on this by
increasing its revenue share, subscriber share,
and spectrum share in each band in each circle
within the prescribed 50% limit as Vodafone
and Idea attempt to reduce theirs.
LISTING BY WAY OF REVERSE
MERGER
Reverse merger occurs when a larger company
merges into a smaller company. It is
commonly adopted for tax benefits because
the smaller company’s relatively smaller tax
liabilities alone get carried forward. Popular
examples are Godrej Soaps Ltd.’s reverse
merger with loss-making Godrej Innovations
Chemical Ltd and ICICI’s merger into ICICI
bank.
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Analysis of A Corporate Transaction
Reverse merger can also be used as a tool for
backdoor listing in Stock Exchange without
going for an Initial Public Offer (IPO). The
deconsolidation of Vodafone India and its
merger into Idea results in its indirect listing in
the National Stock Exchange (NSE) [14].
Vodafone has an interesting history of indirect
listing in the Indian Stock Market. Vodafone
Essar was indirectly listed on the Bombay
Stock Exchange (BSE) in 2011 after Essar
Telecommunications Holdings (Essar) which
held 11%, was merged with the listed
company, India Securities Ltd (ISL). Essar
underwent a reverse listing into ISL and
became public.
Vodafone objected to the reverse merger of
Essar into ISL since it believed that ISL is
illiquid and it did not want its Indian venture
to become a subject of a false market.
However, the Madras High Court cleared the
merger and rejected Vodafone’s plea [15].
The back-door listing of Vodafone Essar
happened by virtue of S.43A of the 1956
Companies Act. Under the provisions of
S.43A, a private company in which more than
25% of the paid up share capital is held by
body corporates that are not private shall be
deemed to be a public company. The 1956 Act
does not create a distinction between body
corporates incorporated abroad and those that
are incorporated in India. Hence, the
shareholding of the paid-up equity of
Vodafone Essar easily exceeds the 25% limit
after Essar was merged with a listed company.
Therefore, Vodafone Essar was deemed
public.
Vodafone soon bought out Essar’s 33% stake
and it was removed from BSE. In 2012, it was
planning to list its Indian operations, but it
dropped the idea. By 2014, Vodafone India
acquired 100% shareholding in its Indian
venture. In August 2016, Vodafone Group was
again preparing to file draft prospectus for the
planned IPO of its Indian business for an
estimated $2.5 billion issue, but it did not
materialise [16].
Finally, Vodafone will enter the Indian stock
market through its reverse merger with Idea,
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Lakshana R
which is a listed company. Additionally, via
SEBI Board Meeting of January 14, 2017,
further guidelines were issued to regulate the
merger of an unlisted company with a listed
entity [17]. It is mandatory for qualified
institutional buyers of the unlisted entity and
the public shareholders of the pre-merger
listed entity to own 25% shareholding in the
new entity. The listed company must seek
approval from its public shareholders when
their voting share is falling more than by 5%,
when the consideration is not in the form of
listed shares and the listed company acquires
shares in the unlisted company from its
promoters [18].
Idea is working towards complying with the
conditions laid down in the SEBI Board
Meeting. The pricing formula as per SEBI
(Issue of Capital and Disclosure
Requirements) Regulations, 2009 (as amended
subsequently) are also being strictly followed.
Idea is currently engaged in the process of
obtaining the consent of its public
shareholders through e-voting. Once the
process is completed, a compliance report
along with the merger scheme will be filed
before SEBI and the NSE.
Step-by-step process involved in backdoor
listing of Vodafone
1. Transfer of 4.9% shares in Vodafone to
AB Group. Shareholding of other Idea
Shareholders to be proportionately
reduced as per merger ratio to allot shares
in the Joint Venture Company (JVC).
2. Draft Scheme of Arrangement under
Sections 230-234 of the Companies Act,
2013.
3. Idea shall obtain a no objection letter from
NSE for the draft scheme of arrangement.
4. NSE shall forward the draft scheme of
arrangement to SEBI.
5. SEBI shall provide its observations to the
draft scheme of arrangement within 30
days and send it to NSE.
6. Idea shall place the observation letter of
the stock exchanges, in the explanatory
statement or notice or proposal
accompanying resolution seeking
approvals of the Scheme.
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Journal of Corporate Governance and International Business Law
Volume 2, Issue 1
7. Idea shall file a draft scheme of
arrangement before NCLT obtaining a no
objection letter from NSE, which shall be
placed before NCLT.
8. Indirect listing of Vodafone India, which
has now merged into Idea to form JVC,
occurs.
COMMERCIAL CONSIDERATIONS
CAPTURING SYNERGIES
Synergy refers to the value addition made
when two or more entities merge to create a
new entity and expand opportunities and
possibilities beyond what was available to the
independent entities [19]. Bernstein
Research’s Chris Lane estimates that
Vodafone and Idea could see a fall in market
share and fail to realise some of their potential
synergies [20]. They believe that synergies are
delivered only if staff is retrenched, network
overlaps completely eliminated, brands
integrated and marketing budgets cut-down.
All of these strategies are disruptive and
generally result in share loss.
Vodafone-Idea has announced that it won’t
implement such strategies. Only time will tell
what how well Vodafone and Idea synergise
their operations and finances. The company’s
synergy expectations can be understood under
two categories- financial synergy and
operating synergy.
Financial synergy
Financial synergy is created through higher
cash flows or through the lowering of the cost
of the capital. Vodafone has announced that it
expects synergy benefits to the tune of $10
billion in NPV terms after integration of costs
and spectrum liberalisation payments and an
estimated $2.1 billion of savings by the fourth
year of completion.
The Indian telecom market conditions do not
appear conducive, but Vodafone has a good
track record in other jurisdictions. In Spain,
where in 2014 Vodafone bought cable
company Ono for about 7.2 billion euro, and
in Germany, where it took over Kabel
Deutschland for 7.7 billion euro in 2013, the
new entities are on track to deliver higher
synergies than originally targeted. The Spanish
JoCGIBL (2019) 1-9 © Law Journals 2019. All Rights Reserved
entity is set to deliver 40% more than the
initially targeted 2 billion euro in NPV, while
in Germany the additional synergistic benefits
is expected to be at around 17% [21].
Operating synergy
Operating synergy is created by increase in
income through the use of existing assets [22].
In the Vodafone-Idea merger, we will see the
development of economies of scale, primarily
due to the horizontal nature of the merger,
resulting in a more cost-efficient entity. The
major cost and capex synergies would revolve
around network infrastructure, working
efficiencies, lower maintenance expenses,
energy cost savings, redeployment of
overlapping equipment from rationalised sites,
service centres, back office and distribution
efficiencies, streamlining regional and
nationwide IT systems and evolving to a single
IT system besides optimising costs.
DECONSOLIDATION OF
VODAFONE INDIA
Deconsolidation is a method by which a parent
company can remove a subsidiary from its
financial results. Vodafone has been toying
with the idea for a while since it is embroiled
in several regulatory disputes in India and does
not report huge profits. Vodafone made its
dissatisfaction patent through Chairman
Gerard Kleisterlee’s comment in the 2016
annual report that India’s regulatory
challenges hamper its economic development
and hinder corporate growth [23].
Deconsolidation has been a major
phenomenon in the Venezuelan ventures of
US companies. Ford recently wrote off its
Venezuelan assets entirely and valued its
Venezuelan operations at zero because
currency controls restrict the subsidiary's
ability to purchase parts and pay dividends.
This recent accounting change would isolate
the Venezuelan operations so that they would
no longer flow through to the parent
company’s financial results [24].
In the US, deconsolidation is allowed when
government-imposed uncertainties are so
severe that the parent's ability to control the
subsidiary is in doubt. This exception under
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Analysis of A Corporate Transaction
the U.S. accounting rule allows subsidiaries'
assets to be marked to market value and
reported on the balance sheet as an investment
instead of under core assets and liabilities. On
the income statement, the operations typically
would no longer be part of the parent’s
financial results.
The deconsolidation in Venezuela is
happening because of currency changes that
are making companies lose control. Most
companies that deconsolidate because of a loss
of control will likely value their Venezuelan
operations near zero. Certain companies desist
from completely writing off their assets and
choose to re-valuate them. Several US
companies have exited the market altogether
while some companies are facing
expropriation of assets [25].
In the Indian market, Tata Steel Ltd., which
bought Corus for $12.8 billion in 2006, took a
83.56-billion-rupee write-down. A few days
later, Tata Chemicals Ltd. shaved off 4.84
billion rupees primarily relating to the
European operations.
As mentioned earlier, one of Vodafone’s
major motivations for the merger is to entirely
deconsolidate its Indian arm. In November
2016, Vodafone slashed the value of its local
business by five billion euros (Rs 36,449
crore). The planned merger offers the global
telecom major an opportunity to downsize its
engagement with a market in which promise
has outweighed performance, without actually
exiting it. The deconsolidation of the India
arm is expected to reduce Vodafone’s net debt
by around Rs. 55,000 crores.
SIGNIFICANT COST-CUTS
Mergers in telecom industry help in reducing
redundancies and consolidating customer base.
Vodafone and Idea both hold stake in Indus
Towers and they lease cell towers at certain
prices. Post-merger, Vodafone’s 42% stake in
Indus Towers will remain whereas Idea will
dispose of its shareholding. This will eliminate
redundant costs since there will be a common
expenditure on cell tower tenancies. Sharing of
infrastructure will thus significantly decrease
the costs of the new entity.
JoCGIBL (2019) 1-9 © Law Journals 2019. All Rights Reserved
Lakshana R
WIDER MARKET REACH
Post-merger the new entity will have greater
access to fibre cables for 4G and 5G network.
Vodafone is the market leader in Urban circles
and Idea is a key player in category B circles.
The merger will allow the new entity to have a
stronghold in both urban and rural areas. The
new entity will be the market leader in 12 out
of the 22 circles, and it will be only behind
Airtel in nine circles.
In the US, a contemporary example is Level
3’s purchase of TW telecom, which brought
the firm additional network fibre buildings and
helped expand its building footprint to nearly
21,000 buildings.
UNADDRESSED ISSUES &
POTENTIAL RISKS
The companies have not identified a mode of
deadlock resolution. It is generally advisable
to devise mechanisms to resolve an impasse in
case of equal joint ventures. Otherwise, there
could be unavoidable deterrence to the
effective functioning of the Board.
For instance, the equal division of powers
concerning the appointment of Key
Managerial Personnel (KMP) could create
conflict. In the past, where clear terms of
appointed existed, there have been huge
controversies as seen in the merger between
HDFC Life Insurance Co. Ltd and Max Life
Insurance Co. Ltd, which created India’s
largest private insurer.
The shareholder agreement contemplates
modes for further capital infusion neither
during the lock-in period nor post the four-
year timeframe. This is important because the
new entity will be highly leveraged and debt
financing may not be feasible. Additional
capital contribution by the JV parties involves
several considerations. In order to maintain
equal shareholding, both parties will have to
make the same amount of value addition. The
liquidity and the capacity of the JV parties
may not permit equal capital infusion when the
JV entity is in need of it.
Further, the merger agreement does not
discuss protections for foreground and
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Journal of Corporate Governance and International Business Law
Volume 2, Issue 1
background Intellectual Property of the JV
parties. Indemnity provisions are also
conspicuous in their absence. The JV parties
have declared their intention to synergise
operations but there is no clarity on integration
of supply chain and other verticals.
CONCLUSION
Vodafone has clearly made its Indian
operations subservient to its global goals. The
world’s second largest company has invested
circa £19 billion over the last three years to
increase its coverage in the United Kingdom
as part of its ‘Project Spring program’ [26].
Vodafone has also immersed itself neck-deep
in the fixed-line service market in Europe.
Vodafone’s forays in UK and the rest of
Europe and its deconsolidation of its Indian
subsidiary clearly indicate that after aborted
IPOs, two write-downs and a pending
humongous retrospective tax liability, the
telecom giant has initiated the final countdown
in India.
It is undeniable that the deal is necessary for
both parties after the competitive pricing
onslaught brought on by RJio. However, when
a corporate marriage is a response to an
outside threat and global financial concerns,
the scope for adverse consequences for the
parties involved is much higher.
A major beneficiary of consolidation in the
sector and the merger of Vodafone and Idea
operations is the consumer as the three top
players (Bharti Airtel, Idea-Vodafone and
Reliance Jio) will bring in best technology at
best prices to retain customers in a sector
where brand loyalty has been diluted by
Mobile Number Portability [27].Vodafone and
Idea have also announced their plan to explore
flexible business diversification opportunities
along the lines of Airtel’s tryst with Wynk app
and Airtel Money. The two companies are also
hoping to capitalise on the first mover
advantage in the Internet of Things (IoT)
market in India by commercially offering
smart cars and connected homes at affordable
prices. Vodafone and Idea hope to collaborate
with other investors in implementing their
plans for the future so that they can limit
exposure and maximise synergistic
JoCGIBL (2019) 1-9 © Law Journals 2019. All Rights Reserved
capabilities. Only time will tell how much of
their hopes and plans will materialise into
realities in the coming future.
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Analysis of A Corporate Transaction
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22 Supra note 19.
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