India’s biggest IPO is turning into a billion-dollar merger opportunity after British telecommunications giant Vodafone said it is in talks to merge its Indian unit with local mobile operator Idea Cellular.
Vodafone’s statement this week ended bankers’ hopes of the flotation of Vodafone India and the massive underwriting fees that would come with it. Some analysts had estimated that the IPO could raise as much as $4 billion. That would make it the country’s largest ever listing, beating Coal India’s $3.5 billion deal in 2010.
Just how big the loss is can be seen by the deal size relative to the market. At $4 billion, the deal would almost match India’s total IPO volume of $4.1 billion in 2016, according to Dealogic. That is not because last year was slow; it was, in fact, the second-highest year on record.
The mandated managers — Bank of America Merrill Lynch, Deutsche Bank, HSBC, ICICI Securities, Kotak Investment Bank and UBS — are now turning their attention to what could be the country’s largest M&A deal of the decade.
The merger, which will see Mumbai-listed Idea Cellular snapping up Vodafone India’s assets, could be worth about $16 billion. That is Vodafone India’s market value as estimated by Macquarie analysts. If the deal goes ahead, it would surpass the $12.9 billion privatisation of Essar Oil last year and become the second largest corporate merger in Indian history.
But while the merger value is larger than Vodafone India’s planned floatation, it is not going to require heavy financing on Idea's part. The company has said the proposed merger will be executed through issuing new shares to Vodafone, implying that the deal will not require any financing and that bankers working on the deal will get only advisory fees.
That is an even bigger blow to investment banks — and a smarter move for Idea — considering that India’s benchmark lending cost of 6.25% is the highest among Asia’s major economies.
In addition, these banks will have to fight for the single sell-side advisory role that Vodafone is likely to provide. That is different from equity transactions, where an issuer relies on multiple banks for larger distribution capabilities.
Pulling out
The merger would mark Vodafone's withdrawal from the Indian market. It also clears the uncertainties that have faced Vodafone India’s prolonged listing process. The deal has been stalled partly because of its litigation with India’s tax authority.
The British telecommunications giant was involved in a tax dispute over its acquisition of the Indian assets of Hong Kong’s Hutchison Telecommunications in 2006. The government has said it will charge Vodafone $4.5 billion in taxes and fines.
That could be part of the reason Vodafone is pulling out of the fast-growing market despite walking away with a loss. It bought Hutchison Telecommunications at an enterprise value of $18.8 billion in India’s largest ever M&A transaction.
For Idea Cellular, the acquisition is an immediate boost to its market share in the face of Reliance Industries’ aggressive push into the mobile market. The Indian conglomerate, controlled by billionaire Mukesh Ambani, launched its 4G-LTE services in September last year, triggering a price war between India's major mobile carriers.
A merger between Idea Cellular and Vodafone India would create one of the world’s largest telecommunications service providers with over 400 million subscribers. That is nearly a third of the Indian population and more than the entirety of the US.
The two companies are also seen to be complementary to each other since Vodafone India is strong in urban areas while Idea Cellular focuses more on the rural mass market, according to Fitch Ratings.
The merger could, however, spark antitrust concerns since the combined entity could own more than half of India’s mobile market share, Fitch said in a statement.
