Voda­fone/Idea: op­tions strat­egy

Financial Times Middle East - - Lex -

Some mar­kets are too im­por­tant to ig­nore. BP was burnt in Rus­sia but still went back for more. Voda­fone, which has taken $6.6bn of write­downs in In­dia, is try­ing to cap its li­a­bil­i­ties with­out giv­ing up on a coun­try where a price war has crushed mar­gins.

Yes­ter­day, the UK tele­coms group said it would in­ject its In­dian op­er­a­tions into Idea Cel­lu­lar in a com­plex deal that will ini­tially leave it with 45.1 per cent of the com­bined group. Con­glom­er­ate Aditya Birla Group will own 26 per cent and Idea’s mi­nor­ity in­vestors 28.9 per cent.

The im­me­di­ate up­side is ob­vi­ous. The new com­pany — so far name­less, but let us call it Vodea — will be the biggest tele­coms group in the coun­try with al­most twice as many cus­tomers as Voda­fone In­dia alone. Idea’s pres­ence in ru­ral ar­eas com­ple­ments Voda­fone’s strong po­si­tion in cities.

As Voda­fone’s in­ter­est in Vodea will be be­low half, it will be de­con­sol­i­dated. That will shift about $8.2bn of debt off its bal­ance sheet. Fur­ther cash pro­ceeds could come from the sale of all or part of its 42 per cent stake (worth around $4bn) in masts group In­dus Tow­ers, which is not in­cluded in the merger agree­ment. Vodea is meant to be self-fund­ing, helped by $2bn a year of cost sav­ings and ra­tio­nalised cap­i­tal spend­ing. With less debt and freed of fur­ther com­mit­ments in In­dia, the UK group could in­vest in mar­kets that ex­hibit more ra­tio­nal pric­ing.

Voda­fone is con­fi­dent that even­tual cash re­turns from Vodea’s div­i­dends, plus the Vodea shares it sells to Birla over the next few years, will ex­ceed what it might have made had it ploughed on alone. Birla’s even­tual stake could be as much as 35 per cent or as lit­tle as 26 per cent, un­der an equal­i­sa­tion agree­ment that looks gen­er­ous to the In­dian com­pany.

The risks are ob­vi­ous. The In­dian tele­coms mar­ket could un­dergo plenty more dis­rup­tion of the kind cre­ated by up­start Jio in the 12-18 months it may take to com­plete the deal. Although Voda­fone will start as the biggest share­holder, it cedes con­trol to a board where it will nom­i­nate only a quar­ter of the directors. And ri­vals could poach cus­tomers while Vodea is pre­oc­cu­pied with com­pli­ance and cost sav­ings.

Cru­cially, Voda­fone has an exit route. Vodea will re­main a listed com­pany. If In­dia turns out well, Voda­fone could even­tu­ally in­crease its stake; if not, it could sell out with rel­a­tive ease. That is the best as­pect of the en­tire deal.

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