Question

Look for an example of a recent merger/acquisition.

Explain the acquisition terms.

Identify who was the acquiring company and what type of merger it was.

Discuss some of the advantages/challenges of the merger.

Answer 1

Solution:-

                                              Vodafone-Idea Merger

The high profile merger was announced at a time when the new entrant Reliance Jio started disrupting the Indian telecom industry. The combined entity with Kumar Mangalam Birla as chairman is going to be the largest telecommunications service provider in the country with about 400 million customers, 35 percent customer market share, and 41 percent revenue market share.

In the initial phase, Vodafone owns the major stake in the combined entity with 45.1% stake after which it will transfer 4.9 percent stake to Aditya Birla Group in exchange to Rs 3874 crores to complete the deal. Consequently, Aditya Birla Group will own 26 percent stake with an allowance to buy shares from Vodafone under stipulated agreement.

With the combined infrastructure, technology, intangible assets, etc., the company will take the fight against Bharti Airtel and Reliance Jio.

Terms of Merger:-

The all-share merger for both partners excludes Vodafone's 42 per cent stake in Indus Towers and will be effected through issuing new shares in Idea to Vodafone and result in Vodafone deconsolidating Vodafone India. Vodafone will own 45.1 per cent in the new company after transferring 4.9 per cent to the Aditya Birla group for Rs 3,874 crore in cash concurrent with completion of the merger. Idea will hold 26 per cent of the combined entity while the rest will be owned by public shareholders. Idea and Vodafone said the merged entity will be jointly controlled by Vodafone and the Aditya Birla group as per shareholders' agreement. With 204.68 million customers, Vodafone enjoys market share of 18.16 per cent.

Idea has 16.9 per cent with 190.51 million customers as of December 2016, according to Trai data. Airtel, with a market share of 23.58 per cent and a customer base of 265.85 million, leads the market both in terms of revenue and customer base. According to CLSA report in January, the merged entity will have revenue of over Rs 80,000 crore, translating into a 43 per cent share by revenue and 40 per cent by active subscriber base with around 400 million customers. The combined venture will account for over 25 per cent of the allocated spectrum and will have to sell about 1 per cent (worth Rs 5,400 crore) to comply with spectrum cap norms. "The merger pegs implied enterprise valuation of Rs 82,800 crore (USD 12.4 billion) for Vodafone India and Rs 72,200 crore (USD 10.8 billion) for Idea," according to an exchange filing by Idea. The companies had a net debt of Rs 1.07 trillion as of December 2016.

Vodafone is the acquiring company in this case