Ways2Capital Reviews : Telecom Ministry Gives Conditional Approval Of Vodafone-Idea Merger

According to media sources, the telecom ministry has approved the merger between Vodafone India and Idea Cellular. However, the Department of Telecom (DoT) has cleared the Vodafone-Idea merger based on both companies meeting certain conditions. The DoT has raised a demand of Rs7,200cr regarding the transfer of spectrum between Idea and Vodafone. Idea Cellular would need to pay ~Rs3,900cr in cash for Vodafone spectrum and provide a bank guarantee of ~Rs3,300cr for the remainder of the payment. The merger has already received clearance from the National Company Law Tribunal (NCLT), the Competition Commission of India and SEBI.

The Idea-Vodafone merger will create the largest telecom operator in the country with a subscriber base of ~440mn. Vodafone is expected to own ~45 percent stake in the merged entity, while the Aditya Birla Group and Idea shareholders would have ~26 percent and ~29 percent stake respectively. If the shareholding of Vodafone and the Aditya Birla Group are not equal after four years, Vodafone would sell part of its shareholding to equalise its stake with that of the Aditya Birla Group.

Idea Cellular is facing intense competition, hence we expect revenue CAGR of 6.4% over FY18-20E leading to an EBITDA margin of 23% in FY20E. Revenue growth would be supported by a significant growth in data revenues over FY18-20E. EBITDA margin are expected to expand by 161bps to 23% in FY20E. The stock is currently trading at 10x FY20E EBITDA.

Idea Cellular, a wireless operator, is the third largest mobile service provider in India. The subscriber base for the company stood at 207.7mn subscribers at the end of Q4FY18, with an average ARPU of Rs105. RMS for Idea Cellular stood at 15.6% for Q4FY18. Due to announcemnt of a merger between Bharti Infratel and Indus Towers, Idea Cellular would be able to divest its 11.15% stake in Indus Towers. Idea Cellular could receive a payout of as much as ~Rs6,500cr (based on price at time of announcement), which would help reduce the company’s net debt-to-EBITDA further.
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About Bhoomi Desai