Voda Deal may Require Birlas to Pump .₹ 25,150 Cr Into Idea
AB Group has to raise stake to ensure equal rights with UK co in new telco
Kalyan Parbat & Devina Sengupta
Kolkata | Mumbai: The Aditya Birla Group needs to pump in cash to raise its stake in Idea Cellular or the combined entity to have equal rights in a telecom joint venture with UK’s Vodafone Group, analysts said, adding that the Indian conglomerate may have to shell out around $3.5 billion (.`25,150 crore) for a structure that could see the two hold 37.5% each. They add that another option is for a strategic investor to buy a portion of the UK telecom major’s stake to reduce it to match the Birla group’s holding.
Meanwhile, parallel talks are believed to be on for major shareholder Axiata to reduce its holdings from about 20% in Idea in favour of the Indian group before any merger, a person familiar with the matter said.
Excluding its 42% stake in Indus Towers, Vodafone India, the country’s No. 2 telco, is valued at close to .₹ 50,000 crore, as per analysts, 1.2-1.3 times the third-ranked Idea’s market cap, which was over .₹ 39,000 crore at close of trade February 3. The Birla group owns roughly 42% of Idea Cellular. The Vodafone Group is a 100% owner of its Indian unit. Brokerage HSBC expects “Vodafone Group Plc and Idea’s promoter Aditya Birla Group will end up with 37.5% each” in the merged entity, while analysts at Credit Suisse peg their initial respective shareholdings at 39% each, both on the assumption that the Birlas will infuse sizeable equity capital in the combined entity to level its stake with Vodafone’s.
Brokerage Credit Suisse estimates that the Birla group’s requisite equity infusion into the Vodafone-Idea merged entity could range between “$2.39 billion and $3.72 billion, depending on Idea’s stock price”.
The Aditya Birla Group though faces a Catch-22 situation, in that the more its stock price jumps amid ongoing merger talks, the more it would need to cough up to ensure shareholding parity with Vodafone. In a little over two weeks, the Idea scrip has shot up nearly 62% from .₹ 67.5 (on January 18) to .₹ 109.20 on BSE on February 3.
At .₹ 77 per share for Idea, the Birla Group would need to put in nearly $2.4 bil- lion to keep its stake at 39%; at .₹ 100, $3.1 billion; at .₹ 110, $3.4 billion; and at .₹ 120, $3.72 billion, according to Credit Suisse estimates. It added that the high equity infusion may lead to some questioning of “the deal logic from the group’s perspective”.
Idea’s minority shareholders, including Malaysia’s Axiata, analysts said, would own the remaining stake. In case of an initial structure of 39% each, Vodafone and Aditya Birla Group would need to bring it down to 37.5% each to conform to rules which require minority shareholders in a listed entity to hold a minimum 25%. As per the shareholders’ pact, Axiata has the right to keep its holding at around the current levels, in case of an issue of shares by the Indian telco. A Vodafone Group Plc spokesman said the company “has nothing further to say at this stage” (beyond the January 30 announcement), and would not be commenting to ET’s queries.
Industry insiders added that a strategic investor option could also be on the table to bridge the valuation gap with Vodafone, which has more users and revenue than Idea, which is more efficiently run and has been growing faster. An industry executive added that the advent of a strategic investor would make it easier for the UK company to justify its equal rights merger strategy to shareholders, despite being the larger entity. Analysts at HSBC suggest that another possible solution could be Vodafone picking up a higher stake but agreeing to let the Birla group have equal control over the merged operation.