US private equity firm Providence Equity Partners sold its entire 3.3% stake in Idea Cellular for Rs12.9 billion ($193 million) through a block trade on Monday, marking an end to its 11-year shareholding in the Indian telecommunications service provider.
Bankers familiar with the situation said Providence sold 120 million Idea Cellular shares through its subsidiary P5 Asia Investment (Mauritius) at Rs107.1 per share, implying a 6.5% discount to the stock’s closing price of Rs114.55 on Tuesday. The shares were pitched at between Rs106.5 and Rs114.55, or a 0% to 7% discount to Monday's closing price.
Providence was Idea Cellular’s seventh largest shareholder before the stake sale.
One source familiar with the situation said allocations were given to about 20 accounts, including two anchor investors who took the bulk of the deal and the remainder evenly split between international long-only and domestic mutual funds.
The share sale was executed a month after the telecommunications firm confirmed talks to merge with Vodafone India in what could be the second biggest corporate merger in Indian history.
Idea Cellular said earlier this month that it will finance the jumbo acquisition of Vodafone India — estimated to be worth $16 billion — by issuing new shares to its British parent. As such, Providence is likely to have sold the shares ahead of the merger in order to avoid dilution.
The level of equity dilution facing other Idea Cellular shareholders, including Commonwealth Bank of Australia and ICICI Prudential Life Insurance, is still uncertain at this point as it will depend on the share swap ratio and Vodafone India’s final equity valuation.
But the dilution is expected to be huge — Idea Cellular could be acquiring an entity that is more than 2.5 times bigger than itself. Idea Cellular was valued at $6.2 billion based on Monday’s closing price.
Coming off a fall
Providence bought a 15% stake in Idea Cellular for $640 million in 2006, a year before the telecommunications firm went public. Providence first showed its intention to exit its investment in 2014, when it sold a 2.5% stake in the company for $234 million. It sold another 3.5% stake for $205 million in June last year.
For Providence, the merger talks provided an excellent opportunity to cash out its position in Idea Cellular at a higher price, after shares of the company fell by as much as 65% from a peak of Rs202.75 in April 2015. They were trading at the lowest level in four and a half years, before gaining 47% in a month after the company revealed the merger talks in late January.
Idea Cellular's stock has been underperforming since Reliance Jio Infocomm’s entry into India’s telecommunications market last September, triggering a price war between the country’s largest mobile carriers.
The company is seen as the biggest victim of the increased competition because it is the smallest among India’s three mobile carriers in terms of number of subscribers. At the end of January, Bharti Airtel had 365 million users while Vodafone India had 269 million subscribers.
Reliance Jio’s strategy of offering free voice calls and cheap data plans has earned it over 100 million users within six months after entering the market, allowing it to catch up quickly with Idea Cellular’s 185 million users as of the end of last year.
Idea Cellular now hopes to fend off Reliance Jio through a tie-up with Vodafone India, which will create an industry titan with over 400 million users and a 36% share of India’s telecom market. Analysts think the merger could create other synergies, such as lower network and administrative costs.
Citigroup was the sole bookrunner of the block trade.
