The valuation of the merged Vodafone India-Idea Celullar entity is likely more around Rs 160 a share, 23% higher than the Rs 130 a unit price that the UK telco has agreed to sell its shares at to the Aditya Birla Group, after accounting for all the operational synergies, said a Vodafone official.“Vodafone has been very conservative with the Rs 130 figure, but in the true sense, if one adds the $10 billion operational synergies to the Rs 72.5 a unit that has been taken to peg the enterprise value of the companies for the deal, the value of the merged entity comes to around Rs 160 a share,” says one of several company executives that ET spoke to.
Vodafone has agreed to sell 9.5% additional stake at Rs 130 a share to Aditya Birla Group in the merged entity in three years after the closure of the deal in 2018, as both companies try and equalise their shareholding over time.
Investors, who had driven up the stock nearly 44% since the start of the year to March 2017 on expectations of the deal, deemed the Rs 130 as a cap for the upside, and have been exiting the stock since the deal was announced on Monday. Idea shares have fallen by 15% this week, and closed at Rs 91.60 on the BSE on Thursday.
“Even the Rs 160 value doesn’t take into account the revenue upside for the merged entity that is likely to be seen once the market stabilises in 12 to 18 months,” a second person said. “Jio is starting to charge soon, and they are in the market to make money as well. So, prices will stabilise over time.”
He noted that Vodafone generates Ebitda in 12 of its 22 circles, while Idea does so in 10 circles, with none of the positive circles overlapping. “So, the merged entity should be Ebitda positive from day one.” Vodafone did not offer any comments on ET’s queries.
Idea’s stock has also been under pressure with analysts questioning if the two will be able to deliver the entity’s expected synergy benefits worth $10 billion in net present value (NPV) terms after integration of costs and spectrum liberalisation payments and an estimated $2.1 billion of savings by the fourth year of completion. The concerns are due to the challenging market conditions underlined by an ongoing brutal price war in the Indian telecom market.
“Look at the Vodafone track record. It has been able to drive higher operational synergies in Germany and Spain than committed,” said a third person.
He noted that both in Spain, where in 2014 Vodafone bought cable company Ono for about 7.2 billion euro, and in Germany, where the UK telco took over Kabel Deutschland for 7.7 billion euro in 2013, the new entities are on track to deliver higher operational synergies than originally targeted.
For example, the Spanish entity is on track to deliver 40% higher synergies than the 2 billion euro in NPV initially aimed for, while in Germany, the out performance on synergies is expected to be by 17%.
Vodafone Group CEO Vittorio Colao has told analysts that he was “comfortable” with the synergy targets committed for the Idea-Vodafone deal.
Vodafone and Idea on Monday announced merging their operations which would create India’s largest and the world’s second largest mobile phone company by subscribers. Initially, Vodafone would own 45.1% in the new entity, with Aditya Birla group, the promoters of Idea, owning 26%. The Indian conglomerate has the right to increase its stake by 9.5% over four years. If it does not exercise this option, Vodafone would need to sell down its shares to bring its holding at par with ABG over the next five years.
Vodafone executives said this was the most complex deal the company had ever concluded, because while the UK firm was larger in size and operations, the understanding was that it would be negotiated as a ‘merger of equals’.
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