For Idea, merger with Vodafone India is the right call
ET INTELLIGENCE GROUP: An amalgamation with Vodafone India is the right step for Idea Cellular and its investors given the synergies at a time competitive pressure is intensifying. The consolidation will give rise to the largest telecom company in the country with over one-third share in the total subscriber base and 41% share in the sector’s revenue.
However, it will be prudent for investors to observe the impact of Reliance Jio’s entry on incumbents and to wait for growth to pick up before making fresh investments in the counter.
An immediate concern for investors seems to be the Rs 72.5 stock price taken by Idea's management to arrive at the merger ratio, significantly lower than Friday’s closing stock price of Rs 107.9. As a result, even though the stock rose by 14% to Rs 122.9 initially when trading began on Monday on the BSE, it lost momentum and fell by over 9% as the day progressed.
Idea’s management clarified in a press conference later in the morning that the price used to compute the merger ratio was indicative in nature as it was arrived at using the regulatory mechanism of volume weighted average price (VWAP) of the stock for 30 trading sessions prior to the first merger announcement on January 27. It also mentioned that the appropriate indicator of the company’s perceived value is not the merger ratio price but the price of Rs 108 at which Idea’s existing promoter group will pick up 4.9% in the merged entity. The stock closed at Rs 97.6 on Monday.
After this stake purchase worth Rs 3,900 crore, the Aditya Birla Group will hold 26%, while Vodafone will own 45.1% in the merged company. The rest will be with the public and institutions.
The management anticipates the net present value of synergies of cost and capital expenditure at Rs 6,700 crore. The merged entity will own 1,850 megahertz of spectrum. It will have to surrender spectrum in six circles to abide by the regulatory mandate, but the management anticipates it to be a relatively small amount of spectrum.
For investors, the merger fortifies Idea’s competitive position. The synergies will help it unify its efforts to compete effectively with the aggressive growth strategy of Reliance Jio, the telecom arm of petroleum giant Reliance Industries. Jio is seeking growth by making data-related services available at cheaper tariffs on a faster communication platform, 4G. This also means the incumbents, including Idea-Vodafone, will reel under pricing pressure and lower profitability in the medium term. Investors should, therefore, wait for growth in profits and profitability to pick up before making fresh investments.
However, it will be prudent for investors to observe the impact of Reliance Jio’s entry on incumbents and to wait for growth to pick up before making fresh investments in the counter.
An immediate concern for investors seems to be the Rs 72.5 stock price taken by Idea's management to arrive at the merger ratio, significantly lower than Friday’s closing stock price of Rs 107.9. As a result, even though the stock rose by 14% to Rs 122.9 initially when trading began on Monday on the BSE, it lost momentum and fell by over 9% as the day progressed.
Idea’s management clarified in a press conference later in the morning that the price used to compute the merger ratio was indicative in nature as it was arrived at using the regulatory mechanism of volume weighted average price (VWAP) of the stock for 30 trading sessions prior to the first merger announcement on January 27. It also mentioned that the appropriate indicator of the company’s perceived value is not the merger ratio price but the price of Rs 108 at which Idea’s existing promoter group will pick up 4.9% in the merged entity. The stock closed at Rs 97.6 on Monday.
After this stake purchase worth Rs 3,900 crore, the Aditya Birla Group will hold 26%, while Vodafone will own 45.1% in the merged company. The rest will be with the public and institutions.
The management anticipates the net present value of synergies of cost and capital expenditure at Rs 6,700 crore. The merged entity will own 1,850 megahertz of spectrum. It will have to surrender spectrum in six circles to abide by the regulatory mandate, but the management anticipates it to be a relatively small amount of spectrum.
For investors, the merger fortifies Idea’s competitive position. The synergies will help it unify its efforts to compete effectively with the aggressive growth strategy of Reliance Jio, the telecom arm of petroleum giant Reliance Industries. Jio is seeking growth by making data-related services available at cheaper tariffs on a faster communication platform, 4G. This also means the incumbents, including Idea-Vodafone, will reel under pricing pressure and lower profitability in the medium term. Investors should, therefore, wait for growth in profits and profitability to pick up before making fresh investments.
