Voda, Idea Appoint Firms to Conduct Due Diligence EY to work for Voda and Deloitte to work for Idea; process could take at least a month
Sachin Dave & Devina Sengupta
Mumbai: Vodafone Group and the Aditya Birla Group have appointed consultancy firms EY and Deloitte, respectively, to conduct due diligence for the proposed merger of India’s second and third ranked telcos, which could create the country’s largest mobile phone company.
According to people close to the development, Prashant Singhal, global telecommunications leader at EY, has created a team of 25 to carry out due diligence on Idea Cellular for Vodafone. Rajeev Memani, chairman at EY India, is believed to be directly involved with the process.
Deloitte has also put together a 25-member team — spearheaded by Uday Bhansali, president-financial advisory, and Vipul Jhaveri, managing partner, tax and regulatory at Deloitte in India — to conduct financial due diligence on Vodafone for Idea Cellular, they said. Anil Talreja, another partner at Deloitte, is also part of the team.
“The due diligence could last for at least a month,” said a senior executive from one of the two consulting firms mentioned above. UK’s Vodafone Group declined to comment on the story, while the Aditya Birla Group, EY and Deloitte did not respond to emailed queries as of press time on Tuesday. Vodafone and the Aditya Birla group that owns Idea Cellular said on January 30 that they were in talks to form a joint venture with equal rights in an all-share deal, which would create a much stronger telco to take on the competitive threat posed by Reliance Jio Infocomm. The talks involve Vodafone buying fresh shares in Idea and deconsolidating its India unit.
A Vodafone-Idea combination would have about 390 million users, exceeding current market leader Bharti Airtel’s 266 million. The combined entity will also be the largest by revenue market share.
According to people in the know, Vodafone has sought clarity on taxation issues around the merger.
“A major focus of the due diligence would be on whether the merger could create any tax liabilities. Retrospective taxation is a very sensitive topic for the company (Vodafone),” said a person who requested not to be named. “The company wants to be absolutely sure about the tax liability that could arise after the merger,” he added. Vodafone and the Indian government have been embroiled in a .₹ 20,000-crore tax dispute related to the latter’s 2007 acquisition of Hutchison Essar over the past few years. The row has been emblematic of investor concerns related to tax demands stemming from retrospective changes in the law. The matter is currently in international arbitration. Another person in the know said Vodafone has also sought a view on whether the recently announced regulations around domestic transfer pricing or capital gains tax on fair value could be of concern.
The due diligence is also being carried out on the number of mobile towers and also around the financial numbers provided by the other company.
The consultants are also looking at job functions that are being duplicated. The two firms, put together, have more than 30,000 employees. An India Ratings and Research report said the key challenge for the merger — which could create an entity with revenue of around .₹ 77,500 to .₹ 80,000 crore and EBITDA margins of around 28% — will be operational and management control of the merged entity along with the outstanding tax matter of Vodafone India. It, however, said the merger will complement the circle presence of both the entities — Idea has strong presence in rural areas while Vodafone is strong in urban areas.
Analysts at India Ratings believe that Vodafone-Idea merger will improve competitiveness of the resultant entity in around 60% of circles (based on subscriber market share) where the merged entity will become a leading operator as it can offer services at better price points due to the operational synergies in those circles.
They said the merger will also result in capex synergies since it will eliminate the duplication of spectrum capacity and infrastructure-related requirements.
“India Ratings notes that the spectrum of Vodafone India (in seven circles) and Idea (in two circles) which are expiring in FY22 are not in common circles, and there could be potential spectrum capex synergies (the cumulative worth of spectrum in these nine circles is over .₹ 12,000 crore, based on the latest auction prices in those circles),” it said.