Idea Cellular Ltd has said it will sell shares worth Rs3,250 crore to its promoters, and also evaluate a separate equity capital raise of Rs3,500 crore. Simultaneously, Vodafone Group Plc will need to bring in additional capital worth Rs9,350 crore (nearly $1.5 billion) to lower its debt ahead of the merger with Idea Cellular. About a fifth of this will come from Idea Cellular’s promoters in exchange for shares in the merged entity.
Put together, the $2.5 billion equity infusion might seem large, but is barely enough to address the mounting debt of the two companies. When the two companies announced their merger deal last March, Idea Cellular’s adjusted net debt stood at Rs52,700 crore. This rose to Rs56,760 crore by the end of September 2017, according to a Vodafone release.
Worse still, profits have plummeted in the past year, thanks to which leverage ratios have gone out of whack. At the time of the merger announcement, the combined entity had a net debt-Ebitda ratio of 4.4 times. Ebitda stands for earnings before interest, tax, depreciation and amortization.
According to an analyst at a domestic institutional brokerage firm, even after the above-mentioned fundraise and after accounting for the sale of the two companies’ stand-alone towers, the net debt-Ebitda ratio would still be high at around 7.6 times.
Evidently, the two companies, and Idea Cellular, in particular, need to do much more to tame the high leverage. Apart from pursuing the proposed equity capital raise, Idea Cellular needs to quickly find a buyer for its stake in Indus Towers Ltd. And unless the industry’s profitability recovers quickly—a highly unlikely event—a further fundraise may be necessary.
Even if one were to factor in a hefty $12 billion valuation for the Indus sale, what Idea Cellular’s 11.15% stake in the tower company will fetch will only be enough to bring leverage at the combined entity down to around 7 times. This is far higher than the maximum leverage ratio of around 6 times the two companies envisaged when they agreed on merger terms .
The high leverage at the two companies has put constraints on their ability to invest as much as Reliance Jio Infocomm Ltd and Bharti Airtel Ltd. While they managed to protect market share in their leadership circles by concentrating capex in these segments, the fact remains that they have lost ground in the past year.
In the backdrop, a fundraise was long due; although, from the looks of it, a lot more is required to bring the balance sheet of the merged entity to a place of strength.