Vodafone-Idea may sell 15-20% stake in merged company to PE firms to cut debt

Vodafone India and Idea Cellular will likely sell 15-20% equity stake to private equity firms in the combined entity after the proposed merger of the two companies, in order to deleverage the balance sheet and raise much-needed cash for running operations in a hypercompetitive environment, CNBC TV18 reported citing unidentified sources.

Both the companies may end up owning 51% stake in the merged company, just enough to retain majority control, CNBC TV18 said. The combined entity will have an overall debt of over Rs 1 lakh crore.

Idea Cellular shares rallied on the news, and ended up 3.83% at Rs 112.45, after rising to the day’s high of Rs 114.1.

Earlier this month, India’s second-largest telecommunication services provider Vodafone confirmed it is in talks for an all-share merger with the third-largest operator Idea Cellular, in the first consolidation move in the Indian telecom industry reeling under the pressure of intense competition from Reliance Jio’s free service offers. The proposed merger could give both the companies the required scale to take on the heightened competition.

Vodafone is reported to have already appointed professional services firms Deloitte and EY to carry out due diligence for the proposed merger. Both the companies have set up the teams for due diligence and expect to complete it soon.

The due diligence teams would identify potential areas of value erosion from the merger and would also look for any tax liabilities arising out of combining the two firms. The announcement of the merger is expected later this week, according to various news reports.

A possible Vodafone-Idea combine will surpass Bharti Airtel as the largest telecommunication company with a total subscriber base of 39 crore, far ahead of Reliance Jio’s 7.2 crore. Further, the combined entity would have 43% of the revenue market share and 40% of the active subscriber base, research firm CLSA said. The two operators complement each other, with Vodafone having strong presence in urban areas and Idea being an established player in the hinterland. The new capital that Vodafone brings in may be used to pare the substantial debt that Idea has on its books.

However, the combined unit would need to give up some of its precious radio spectrum in order to comply with the regulatory limits on holding radio bandwidth. It will also have to fork out Rs 2,000-3,000 crore by way of spectrum liberalisation charges.

Credit Suisse said in a note earlier last week that the Vodafone-Idea combine may have to shed radio spectrum worth more than Rs 6,000 crore, probably at a lower price than originally purchased.

Reliance Jio’s entry into the telecom space has forced the incumbent players to drastically cut tariffs – as much as by 66% – in order to retain their customer base, and has put the entire sector under tremendous pressure of choosing between protecting margins and user base. Reliance Jio recently extended its inaugural free voice and data plan till March 31 drawing complaints and criticisms from its biggest rivals Airtel, Vodafone and Idea, who assert that its anti-competitive practices and freebies are hurting the industry.