Question

Research the financial press (online media) to find two companies that merged within the last 5 years. Determine or estimate the following:

(maybe the companies, Saudi Aramco and SABIC)

1. Summarize the chronology of events from the first offer that was made by the acquiring firm until the final acquisition was agreed. Include information about other firms that were involved, even in an indirect manner (for example, where there any “white knights” out there?) and the potential synergies that drove the merger, if any.
2. Was the deal 1) all equity, 2) all cash, or 3) a combination thereof?
3. Consider your answer to part (c). Is this a taxable event to 1) the target firm’s existing shareholders, and 2) the acquiring firm’s existing shareholders?
4. Was there a premium offered for the shares of the target firm? If so, try to approximate it
   .

Answer 1

Merger between Vodafone India & Idea to create Vodafone Idea Limited

It was a horizontal merger between Vodafone India & Idea. Both the companies are telecom operators providing a plethora of mobile and data services. Vodafone India was a subsidiary of the Vodafone Group while Idea Cellular Limited was a part of the Aditya Birla Group. The merger was done to counter the changing scenario of the Indian Telecom industry.

Background: Telecom industry is a highly capital intensive sector and as such there are few major players in the Telecom market. In 2015, Airtel, Vodafone and Idea were the major private companies offering telecom services along with state owned BSNL and MTNL. The smaller companies such as Spice, Aircel, etc. had already been absorbed by the larger players. Due to the  pricing power of these companies, they had high operating margins. However, in 2015 Reliance launched its Jio network, initially as a free service during the beta period which lasted for three months. Further Jio drastically revolutionized the industry by drastically reducing the prices and providing newer services such as 4G. Due to the burgeoning competition from Jio, the competitors such as Airtel, Vodafone & Idea had to reduce prices to be on the same level. This was assumed to be a short term scenario however Jio with its deep pockets had cash to burn. With this scenario extending for a long time, the existing telecom companies started suffering losses and impending bankruptcy. The ARPU and customer base had drastically reduced for these companies. To counter this and to gain a foothold in the market Vodafone and Idea planned to merge so as to emerge as a powerful entity to take on their rivals.

Timeline of events:

January 2017: Vodafone confirmed it was in talks with Idea for a proposed merger deal

April 2017: Merger deal is announced by Vodafone

July 2017 to Aug 2018 : approvals from other related regulatory bodies such as DoT, SEBI, CCI are obtained

Aug 2018: Combined entity starts operations

Transaction Details:

Vodafone combines all its entities with Idea Cellular in an all share deal.

Post deal, Vodafone to obtain a 50% share in the combined entity. After completition, Idea to buy a stake of 4.9% in the entity for $579 million in cash. Both Idea & Vodafone to have 50% control rights but ownership split as follows:

• Vodafone: 45.1% • Aditya Birla Group: 26.0% • Idea’s minority shareholders: 28.9%

Aditya Birla Group can buy up to 9.5% from Vodafone during the first 3 years• Valuation of US$14.1 billion for 100% of the combined companies’ equity, equivalent to INR130 per Idea share. On Jan 2017 Idea shares traded at rs. 61. Hence this is 113% premium.

Synergies created:

Since they were operating in same circle, cannibalization will reduce. Back office & customer care efficiencies. Higher sprectrum availability leading to lower capex. Reduced advertisement costs. Combined infrastructure. Creates the largest network base in India to take on Airtel and Jio.

No tax liablity for shareholders.