Transaction details
The transaction will be structured as follows:
Prior to completion of the transaction, Vodafone and Idea intend to sell their standalone tower assets and Ideas 11.15% stake in Indus Towers to reduce leverage in the combined company. Vodafone will also explore strategic options for its 42% stake in Indus Towers; potential options include either a partial or a full disposal.
As the combined company will be jointly controlled by Vodafone and the Aditya Birla Group, Vodafone will deconsolidate11 Vodafone India immediately. Post-closing, the combined company will be reported as a joint venture by Vodafone and accounted for under the equity method, resulting in a decrease of Vodafones net debt. As described above, as at 31 December 2016 this would have been INR552 billion (US$8.2 billion), which together with the INR39 billion (US$579 million) of cash received from the Aditya Birla Group would lower Vodafone Groups reported leverage by around 0.3x Net Debt/EBITDA12.
The transaction is expected to be accretive to Vodafones cash flow13 from the first full year post completion.
Synergy opportunity
The combination of Idea and Vodafone India will create the scale to meet customers rapidly accelerating demand for data consumption, and enable significant efficiencies. Run-rate cost and capex synergies are expected to reach INR140 billion (US$2.1 billion) on an annual basis by the fourth full year post-completion. This is equivalent to a net present value of approximately INR700 billion (US$10.5 billion)14, after integration costs15. Operating cost savings represent 60% of the expected run-rate savings16.
The major expected sources of cost and capex synergies include:
The Parties also anticipate some regulatory dis-synergies. These are primarily driven by spectrum liberalisation payments and requirements to meet regulatory spectrum caps and market share thresholds in certain circles one year after completion of the transaction. Spectrum liberalisation costs are expected to have a net present value impact of approximately INR30 billion (US$0.5 billion).
Equalisation mechanism
The Aditya Birla Group has the right to acquire more shares from Vodafone, under an agreed mechanism, with a view to equalising the Parties shareholdings over time. Until equalisation is achieved, the additional shares held by Vodafone will be restricted and votes will be exercised jointly under the terms of the shareholders agreement.
The Parties have agreed a standstill period for the first three years after closing, during which neither Party can buy any shares from or sell any shares to a third party.
During the standstill period, the Aditya Birla Group has the right to purchase a stake of up to 9.5% in the combined company from Vodafone at an agreed price that is equivalent to an equity value of INR946 billion (US$14.1 billion) for 100% of the combined company (post-closing). This is equivalent to INR130 per share, which represents a premium of 80% to Ideas undisturbed share price of INR72.5 (based on the 30 trading day VWAP as at 27 January 201717).
If the Parties shareholdings have not been equalised over the first three years, the Aditya Birla Group needs to inform Vodafone how many further shares (up to a maximum of 9.5% less any shares purchased in the first three years), it wishes to acquire. The Aditya Birla Group then has a period of 12 months to complete such purchase at the prevailing market price. At the end of the third year after closing, the standstill provisions expire in relation to all shares other than those that the Aditya Birla Group has committed to acquire, if any.
From the beginning of the fifth year after completion, if Vodafone and the Aditya Birla Groups shareholdings in Idea are not yet equal, Vodafone will sell down shares in the combined company to equalise its shareholding to that of the Aditya Birla Group over the following five-year period18.
Joint governance and management
Vodafone and the Aditya Birla Group have entered into a shareholders agreement, and it is intended that the combined companys articles will be amended at closing to reflect certain rights for each Party.
Following completion, the Board of the combined entity will be comprised of 12 directors including three directors appointed by each of Vodafone and the Aditya Birla Group, and six independent directors.
The Aditya Birla Group will have the sole right to appoint the Chairman (as one of its three directors), who will be Mr Kumar Mangalam Birla. Vodafone will have the sole right to appoint the Chief Financial Officer. Both Vodafone and the Aditya Birla Group will jointly agree on the appointment of the Chief Executive Officer and the Chief Operating Officer.
Those roles together with those of the broader management team will be confirmed prior to closing, with appointments made on the principle of the best person for the job.
The Parties rights under the shareholders agreement and the amended articles of the combined company will be subject to a number of conditions including (but not limited to) a Party maintaining its shareholding in the combined company above 26% until 31 March 2020 and above 21% thereafter.
Capital structure and dividend policy
Pro forma net debt as at 31 December 2016 would have been INR1,079 billion (US$16.1 billion). On this basis, leverage of the combined company would have been 4.4x LTM EBITDA19. Pro forma for the sale of Vodafone and Ideas standalone towers as well as Ideas 11.15% stake in Indus and the estimated run-rate opex synergies, leverage would have been 3.0x LTM EBITDA20.
The Parties expect the combined company to be self-funding going forwards but are committed to maintaining appropriate leverage prior to closing and thereafter, aided by the expected sale of Idea and Vodafone Indias standalone towers as well as Ideas 11.15% stake in Indus.
The Parties have agreed a capital structure and dividend policy which is expected to be implemented post completion. This will ensure that the combined company is appropriately capitalised and that excess cash flow21 is distributed to shareholders.
Conditions to completion and indicative timetable
The transaction is subject to approvals from the relevant regulatory authorities. Vodafone and Idea have undertaken preparatory work on the required scheme and other necessary filings.
The transaction is also subject to other customary closing conditions, including the absence of any material adverse change. Shareholder approval will be required from Idea shareholders under a scheme of arrangement. The transaction is not subject to approval from Vodafone shareholders.
The transaction has a break-fee of INR33 billion (US$500 million) that would become payable under certain circumstances.
Vodafone and Idea anticipate that completion will take place during the 2018 calendar year.
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