India’s telecom merger will sort the tigers from the cubs. Two weeks ago, tycoon Kumar Mangalam Birla said he wants to combine his Idea Cellular with Vodafone’s local arm, in a merger “based on equal rights”. Idea shares have soared 55 per cent in the last month. That could help it secure half of the enlarged $25 billion giant — but Birla would still be reduced to a bit part.
It is easy to see why Birla wants a deal. Idea reported its first-ever quarterly net loss on Saturday, amid a price war led by new entrant Jio, which is backed by India’s richest man. Excitement about a potential deal has partially reversed a massive share price slide and means Idea now has a market value of $5.95 billion.
Vodafone India’s equity might be worth roughly the same. The unit earned $949 million of EBITDA in July to December. Annualised and put on a 7.5 times EBITDA multiple — like India’s largest operator Bharti Airtel — that gives an enterprise value of $14.2 billion. Deducting roughly $8.5 billion of net debt leaves $5.7 billion of equity — similar to Idea.
So in a best-case scenario, Idea would only have to handover new shares to Vodafone worth half the enlarged entity. Yet Birla’s effective 42 per cent shareholding in Idea would be halved to just 21 per cent, with Idea’s outside shareholders making up the free float. That would put the tycoon’s shareholding in a clear second place to its new partner.
And this all assumes that Vodafone would be happy to base any deal on Idea’s newly inflated value — which seems optimistic. It also does not adjust for the fact that Vodafone India is worth $3 billion more than Idea including debt. If the parent reduced the leverage before any deal, the value of the Vodafone unit’s equity would rise.
Indian media say Birla may become chairman at the enlarged telecom operator, suggesting Vodafone would get to pick the chief executive. That could look like equality on first blush, but in reality the CEO role matters more. And the relative valuations mean Birla’s equal rights ring false.