MERGER AND ACQUISITION

CIA 1.2
MERGER DEAL ANALYSIS – IDEA &
VODAFONE

Submitted By :

Sahil Goyal | 6BBA C | 1820326

Saloni Jain | 6BBA C | 1820343

Date Of Submission – 10th February 2021
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 TABLE OF CONTENTS

S.NO PAGE
TOPIC
. NO.

1 INTRODUCTION 1

2 REASON FOR MERGER DEAL 2

3 COMPARATIVE ANALYSIS 3-5

4 RESULT ANALYSIS 5-7

5 REFERENCES 8
 BACKGROUND
STORY LINE
 British telecom major Vodafone and Aditya Birla group-run Idea Cellular announced the merger of
their operations, creating the largest mobile operator by customer and revenue market share.
 The merged entity, which will come into force over the next two years, will be headed by Kumar
Mangalam Birla as Chairman.
 Vodafone will have its nominee as the chief financial officer, its CEO Vittorio Colao said here at a
press meet, which was also attended by Birla.
 The all-share merger for both partners excludes Vodafone's 42 per cent stake in Indus Towers and
will be effected through issuing new shares in Idea to Vodafone and result in Vodafone
deconsolidating Vodafone India.
 Vodafone will own 45.1 per cent in the new company after transferring 4.9 per cent to the Aditya
Birla group for Rs 3,874 crore in cash concurrent with completion of the merger.
INTRODUCTION TO COMPANIES

Vodafone Idea Limited

Vodafone Idea Limited is an Aditya Birla Group and Vodafone Group partnership. It is India’s leading
telecom service provider with over 408 million customers and revenue market share of 32.2%
(Q1FY19). With a large spectrum portfolio and number of broadband carriers to support the growing
demand for data and voice, the company is committed to deliver delightful experiences to customers
and contribute towards creating a truly ‘Digital India’ by enabling millions of citizens.

Aditya Birla Group

A US $44.3 billion corporation, the Aditya Birla Group is in the League of Fortune 500
companies. Anchored by an extraordinary force of over 120,000 employees, belonging to 42
nationalities. Aon Hewitt, a reputed global consulting firm, in the ‘Best Employers 2018’ study
conducted by them, have named Aditya Birla Group as the ‘Best Employer’ in India. Over 50% of the
Group’s revenues flow from its overseas operations in 35 countries.
Vodafone Group
Vodafone Group is one of the world’s largest telecommunications companies and provides a
range of services including voice, messaging, data and fixed communications. Vodafone Group has
mobile operations in 25 countries, partners with mobile networks in 46 more, and fixed broadband
operations in 18 markets. As of 30 June 2018, Vodafone Group had 534.5 million mobile customers and
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 19.9 million fixed broadband customers, including India and all of the customers in Vodafone’s joint
ventures and associates.’

SIGNIFICANCE OF THE MERGER IN THE TELECOM SECTOR (Consumers)

 The Indian telecom industry would see the domination of three top telecom companies: Bharti
Airtel, Jio and Vodafone-Idea, out of which the domination of Vodafone-Idea would be the largest. 
 The process of branding will be on an individual basis for both the companies that have been found
to have a complementary nature with respect to each other.

IMPACT OF MERGER IN TELECOM INDUSTRY (Industry)

Several other implications that this merger will bring forth on the telecom industry include:
 There can be initiatives based on the renewal of price discipline for the disruptive entry by Jio has
caused some serious misbalance
 The poor financial health of the telecom sector can be observed and through such mergers, there will
be the inclusion of health and life since India is the fastest-growing market in terms of the
subscriber base.
 The deal saved both the telecom companies from selling off their business which was being
planned initially and which would have directly impacted the quality of services being provided by
different players in the industry.

REASONS CONTRIBUTING TO FAILURE/SUCCESS FOR THIS MERGER

There are also several other implications that this merger will bring forth on the telecom industry.
 Firstly, there can be initiatives based on the renewal of price discipline for the disruptive entry by
Jio has caused some serious misbalance.
 Secondly, the poor financial health of the telecom sector can be observed and through such mergers
there will be infusion of health and life since India is the fastest growing market in terms of the
subscriber base.
 Through the merger, Vodafone and Idea will overcome their debts and large sum of credit will be
infused in the system
 The deal has also saved both the telecom companies from selling off their business, as was being
planned by them initially and this would directly impact the quality of services being provided by
different players in the industry

FINANCIAL STRUCTURE

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 HIGHLIGHTS
 Merger is expected to generate Rs. 140 billion annual synergy, including apex synergies of Rs. 84
billion, equivalent to a net present value of approximately Rs. 700 billion.
 The equity infusion of Rs.67.5 billion at Idea and Rs.86 billion at Vodafone coupled with
monetization of standalone towers of both companies for an enterprise value of Rs. 78.5 billion,
provides the company a strong cash balance of over Rs.193 billion post pay-out of Rs. 39 billion to
the DoT.
 Additionally, the Company has an option to monetise an 11.15% stake in Indus, which would equate
to a cash consideration of Rs. 51 billion.
 As at 30 June 2018, net debt was INR 1092 billion.

 Vodafone will own 45.1 per cent in the new company after transferring 4.9 per cent to the Aditya
Birla group for Rs 3,874 crore in cash concurrent with completion of the merger. Idea will hold 26
per cent of the combined entity while the rest will be owned by public shareholders.

 Idea and Vodafone said the merged entity will be jointly controlled by Vodafone and the Aditya
Birla group as per shareholders' agreement. With 204.68 million customers, Vodafone enjoys
market share of 18.16 per cent.

 Idea has 16.9 per cent with 190.51 million customers as of December 2016, according to TRAI data.

COMPARATIVE ANALYSIS

PRE-POST MERGER ANALYSIS

Details IDEA VODAFONE Idea Integrated with

Vodafone

Revenue 369 447 816

EBITDA 114 130 244

EBITDA (Margin) (% years) 30.89% 29.08% 30%

Net Credit 527 552 1,079

Net / EBITDA Debt 4.62 4.25 4.42

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 Capex 75 79 154

Total investment of Spectrum 617 788 1,405

 The consolidated business will be able to make money from the sale of the Tower, 11.5% of Indus
Towers Stake Sales.
 Four-year partnership profits which will help the company reduce Net Debt / EBITDA to 3.
 While Vodafone also holds a 42% stake in Indus Towers, that is not included in the transaction
perimeter.

FINANCING OF THE MERGER

Instrument – Shareholding Transfer, Cash.

 As per an agreement between Indus shareholders, VIL can raise Rs 5,100 crore in cash from the sale
of Idea Cellular's 11.15% stake in the telecom tower company.
 Vodafone will own 45.1 per cent in the new company after transferring 4.9 per cent to the Aditya
Birla group for Rs 3,874 crore in cash concurrent with completion of the merger.
 Idea will hold 26 per cent of the combined entity while the rest will be owned by public
shareholders.

IMPACT ON SHARE PRICE & SHAREHOLDERS

Share Price
After the announcement of merger Vodafone’s share price jumped up by 3% and Idea’s share prices
soared more than 27% in India.

Value to Shareholders
The two companies agreed to merge their operations with a swap ratio of 1:1. This means every Idea
share you hold 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 Rs 82,800 crore, while Idea’s business is valued at Rs 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, analysts suggest.

Reason for Fall in Share Price

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 Idea share price went to Rs 120 from an average of Rs 72.5 when speculation about the deal began.
However, Idea’s shares fell 14% 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 Kumarmangalam Birla has been named the chairman of the merged entity, a new
Chief Executive Officer (CEO) and Chief Operating Officer (COO) are yet to be appointed. Vodafone
will appoint the Chief Financial Officer (CFO) later. The new management structure is expected to
evolve over the next 12-18 months. A good management is essential for investors.

To maintain an equal partnership, Vodafone will have 45.1% stake in the combined company. This is
after transferring a 4.9% stake at Rs 110 per share to Aditya Birla Group for Rs 3,900 crore in cash.
Aditya Birla Group will then own 26% of the combined company. The remaining 28.9% will be owned
by Idea shareholders. The Birla Group will have the right to buy additional 9.5% 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.

IMPACT ON FINANCIAL STRUCTURE OF THE COMPANY

 To analyse the financial performance of the sample case during post-merger period it has been
observed that company’s turnover during quarter3 went up by 53.52%.

 EBITDA increased from 461 crore in Q2FY19 to 1136.90 crore in Q3FY19. EBITDA margin
increased from 6.02% to 9.67% during the same period.

 There has been a decline in profit after tax by 0.56% on account of high finance cost, integration
cost, and mobile tower exit charges. Additionally, the major reason of declining profit is due to the
intense competition in the market which is because of the competitive tariff being offered by
Reliance Jio-Infocomm limited.

 According to the CEO of the merged entity Mr Balesh Sharma the company is working well on
track to deliver its synergy targets by FY 2021.

 Further notwithstanding the losses incurred by the company, it is said to raise Rs11000 crore from
Vodafone group and Aditya Birla group and infuse the total Rs 25000 in the firm to ensure that
company has sufficient balance sheet flexibility to successfully execute its strategy.

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 RESULT ANALYSIS
PATTERN OF SHARE
SHARE PRICE
35
PRICE
30
25
 A Study of the share prices
20 of the merged entity shows
15 a declining trend and the
10 share prices have fallen
5
drastically from Rs 49.35
0
19 19 19 19 19 19 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18
on 31 August 2018 to Rs
/ 5 / 29/ 2 2/ 1 5/ / 8/ / 1/ 24/ 17/ 10/ / 3/ 26/ 16/ / 9/ / 1/ 25/ 17/ 10/ / 3/ 2 5/ 17/ / 7 / 31/ 24/
2 1/ 1/ 1/ 1 1 2/ 2/ 2/ 12 1/ 1/ 11 11 0/ 0/ 0/ 10 9/ 9/ 9 8/ 8/
1 1 1 1 1 1 1 1 30.45 as on 5th Feb 2019.
The company still needs to
go a long way to gain
investors’ confidence.

 The share price fall due to demand of Jio venture and disrupting the telecom Industry.

Event-Study Analysis
 The event study analysis states that the target company after the announcement of the merger face
negative abnormal returns.

 It has been observed that the companies experience positive abnormal returns before the merger.

 This same has been noted in the Vodafone-Idea case, as the target company faced negative abnormal
returns reducing the share price by approximately 11%.

MERGER ANALYSIS

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  Vodafone, Aditya Birla Group, and Idea is set to own 45.1%, 26% and 28.9% stakes respectively
in the company – with the preconceived agreement that ABG will eventually acquire 9.55% stake
from Vodafone at a later stage, thus making their shareholding equal.
 Some believe that this merger is more beneficial for the Idea users since Idea has a huge rural and
suburban user-base – wherein people are not as data-hungry as the creamy regions of metropolitan
cities, but now they can easily avail these services at a pocket-friendly price which Vodafone Idea
Ltd. offers to provide. When the entities are merged, analysts predict that there might be a messier
price war because this entity will try to retail customers, whereas Jio will try to scoop out
customers from them.
 Enhancement in network infrastructure will be observed while the operational efficiencies have a
chance to reach excellence. Moreover, the revenue market share is expected to rise for all the
locations and the spectrum of the entity would exceed the initial caps.
 It is quite evident that Mergers & Acquisitions have their prime target to achieve synergy in
various business processes and operations hence identifying different kinds of synergies is the
most sought-after goal.
OPINION/SUGGESTION FOR THE MERGER

Though the financial results of

Vodafone-Idea Ltd. is not very

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impressive, it is expected to improve
in
future as its been just a few months and
it generally requires sometime to reap
the positive synergic effect
post-merger. Some areas like the
increased 4G population coverage
have already started witnessing the
synergic effect. Further, the capex levels
of the Vodafone-Idea merged entity
would have to be increased
substantially to match the (network)
capacity generation of peers.
 Though the financial results of Vodafone-Idea Ltd. is not very impressive, it is expected to
improve in future as its been just a few months and it generally requires sometime to reap the
positive synergic effect post-merger.

 Some areas like the increased 4G population coverage have already started witnessing the
synergic effect.

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  Further, the capex levels of the Vodafone-Idea merged entity would have to be increased
substantially to match the network capacity generation of peers.

 In the present case of Vodafone-idea it can be said that Synergy benefits would gradually be
achieved in coming years which will result in higher profits and leverage is expected to reduce,
hence resulting in value addition to shareholder.

MAJOR CHALLENGES IN THE MERGER

 Integration of management of both the organisations will have to cope with cultural differences i.e. staff
working with a foreign MNC versus a home grown firm.
 Vodafone Idea have at least 6 markets –Maharashtra, Gujarat, Kerala, Haryana, Madhya Pradesh and west
Bengal where there combined revenue market would exceed 50% hence they will need to bring down its
revenue market share below 50% as per M&A rules within a period of one year from the date of
consolidation. In terms of spectrum limits, the combined entity will exceed the limit of 25% in four circles-
namely Gujarat, Haryana, Maharashtra and Kerala this excess spectrum is needed to be sold to comply with
M&A guidelines within one year from the date of merger.

 Vodafone’s unresolved tax issues also come to light as talks of the merger loom.When Vodafone
International decided to make its presence felt in India and bought out Hutchinson Essar in 2007, it made the
deal in the Cayman Islands.Thought the Supreme Court saw no fault in the company’s deal, the Indian
government saw that the company had escaped Rs 20,000 crore in unpaid taxes with interest and penalty.
 Price Challenges – Reliance Jio Entry - For telecommunications workers who were dealing with costly
problems and debt, the announcement that Jio was entering the telecommunications industry was a major
blow. Jio has been working for almost six years, and acquired the pan-India 4G spectrum in 2010.

SUMMARY
British telecom major Vodafone and Aditya Birla group-run Idea Cellular announced the merger of their
operations, creating the largest mobile operator by customer and revenue market share. The merged
entity, which will come into force over the next two years, will be headed by Kumar Mangalam Birla as
Chairman. The all-share merger for both partners excludes Vodafone's 42 per cent stake in Indus
Towers and will be affected through issuing new shares in Idea to Vodafone and result in Vodafone
deconsolidating Vodafone India. Idea will hold 26 per cent of the combined entity while the rest will be

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 owned by public shareholders. With 204.68 million customers, Vodafone enjoys market share of 18.16
per cent. Idea has 16.9 per cent with 190.51 million customers as of December 2016, according to Trai
data.
CONCLUSION
Of course, the big caveat in all of these calculations is the usual disclaimer: “all other things remaining
the same”. Things are not only not expected to remain the same, they are practically changing each
passing day, with Reliance Jio making rapid strides in the market. Profitability may well come down
substantially for both Airtel and the Vodafone-Idea combine, as tariffs continue to decline and freebies
continue to increase. Besides, it’s anybody’s guess where market shares settle a few years from now.
Even so, the fact remains that Vodafone and Idea will be in a far better position together than trying to
navigate the gigantic challenges in the telecom market on their own.

REFERENCES

https://www.livemint.com/Companies/liVpiwdNALGfOgccApI6sK/The-rationale-
behindIdeaVodafone-merger-in-five-charts.html

https://economictimes.indiatimes.com/markets/stocks/earnings/vodafone-idea-reports-rs5005- crore-q3-
loss-approves-rights-issue-of-up-to-rs-25000-crore/articleshow/67868710.cms

https://www.investxp.in/analysis-of-the-scheme-of-arrangement-of-the-vodafone-ideabusiness-
combination/

https://www.jagranjosh.com/articles/idea-and-vodafone-merger-a-saga-of-becoming-indias- largest-
telecom-company-1490598696-1

https://economictimes.indiatimes.com/industry/telecom/telecom-news/vodafone-idea-merger- behind-
the-scenes-report-on-corporate-legal-intricacies/articleshow/65206550.cms?from=mdr

https://mnacritique.mergersindia.com/idea-vodafone-telecom-merger/
https://www.ideacellular.com/content/dam/ir/VIL%20Begins%20Operations%20.pdf

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