Reliance Jio’s Entry Didn’t Prompt Merger: Vodafone & Idea CEOs

After weeks of anticipation, Idea Cellular Ltd and Vodafone India Ltd announced that the two companies will merge, creating India’s largest telecommunication company.

The merger is structured such that Vodafone Group Plc will own 45.1 percent of the combined entity after selling a 4.9 percent stake to the Aditya Birla Group. The Aditya Birla Group will own 26 percent and have the right to increase its stake by buying more shares from Vodafone over the next four years.

If Birla doesn’t make any purchase, Vodafone will have to sell down shares to equalise its shareholding to that of the Aditya Birla Group’s.

Kumar Mangalam Birla, group chairman of Aditya Birla Group, will be appointed chairman of Idea, whereas Vodafone will have the sole right to appoint the chief executive officer.

Vodafone and the Aditya Birla Group will have joint control of the company, each having the right to appoint three directors on the board. The transaction is expected to close during 2018.

Did the entry of Reliance Jio prompt this merger? And if yes, will this combination help Vodafone and Idea put up a stronger fight?

BloombergQuint’s Menaka Doshi speaks to Kumar Mangalam Birla, chairman of Aditya Birla Group and Vittorio Colao, chief executive of Vodafone Group Plc.

Also Read: Vodafone & Idea Cellular Team Up To Form India’s Largest Telco

What is the underlying rationale for this deal? Clearly the entry of Jio has led to considerable capital burn in this sector. Will this merger result in a stronger balance sheet and the ability to allocate more capital to the business?

Kumar Mangalam Birla: So I think more than the fact that you have a large competitor, what is more important is the fact that the underlying industry logic of both of these companies and businesses coming together is rock solid. We’ll have 40 percent market share across the country, 35 percent share of customers across the country, 1,850 megahertz (MHz) of spectrum, which is very large by any standard, the fact that we’ll have lightning speeds for data in at least 12 of our leadership circles.

I could go on and on, but I think that gives a flavour of where I’m coming from. A huge complementarity in terms of, we have strengths in certain markets, Vodafone has strength in some others, so a very powerful combination driven by business logic. The fact that we have got a very strong competitor obviously has been a trigger, if at all that has hastened the process, but that is not the fundamental reason for us to come together.

Also Read: Reliance Jio Effect: Vodafone Confirms Merger Talks With Idea

On the issue of a stronger balance sheet – the media statement says the merged entity will be self-funded. I assume any further capital infusion will come from the Aditya Birla Group? Will Vodafone Group Plc want to put in more capital given that it is diluting stake?

Vittorio Colao: First of all, the company will be self-funded. The company will start with a high debt level but it will deleverage quickly because we have assets – the Indus Towers stake that can be disposed. We have $10 billion in synergies and these are synergies mostly on the network equipment, on the towers, on electricity, on things that we can make it happen pretty quickly. And of course, we also think that the market will improve over time.

So the deleveraging of this company will be done pretty quickly and the partners are committed to supporting the company, but we think that the company will be self-supported.

Let me go back to the rationale – you almost seem to imply that the logic is because there is a new competitor, but first of all let’s also give credit to the old competitors which are still there and they are still pretty good and pretty tough, so it’s not that there is just a new competitor in the market, it has always been very competitive.

To some extent, this merger is born out of the success of two companies. We have been very successful in certain circles, Idea has been very successful in other circles and we both have around 900 MHz of spectrum and certainly the complementarity, in the moment of date and in the moment where Digital India implementation requires a lot of spectrum, makes this logic very compelling.

And certainly we’ll be able to offer broadband in rural, in urban (areas), in metros, thanks to a lot of spectrum. Nowhere do we have a market share lower than 10 percent. In the whole of India we are number 1 or number 2. So this is really an industrial logic, it is not in reaction to any old or new competitor.

At a time when you need to be at your agile best, your management teams for the next two years will be focussed on integrating these two businesses, they will be focused on merging cultures. That’s a huge distraction for any telecom player that needs to be able to react quickly to what’s going on in the current competitive scenario. So again I question, on the basis of that, the rationale for this transaction.

Kumar Mangalam Birla: So typically in a situation like this, and I’m sure Vittorio has gone through many more such situations than we have, we have a separate integration team that works only at integration 24x7, and the operating team is actually not really burdened with the whole operation of integration.

That’s how it’s typically done. And you know, I think it’s more about connecting to the hearts and minds of people eventually. It’s all about people, and as long as both our sets of employees are convinced that this is the right thing to do for the company and them, I think that that’s where the crux really lies.

Mr Colao, I want you to respond to that question? Also, is Vodafone Group Plc committed to bringing in more capital? Because your initial press statement said very clearly that you want to deconsolidate the business. Your progressive reduction in ownership of the combined entity seems to me as if this is a clear exit from India, even though you will continue to stay invested as a shareholder in the combined entity.

Vittorio Colao: Let me put this straight and simple. This is not Vodafone’s exit from India. We used to own like a company which was good but had a 22 percent market share, now we own the same amount in a company which is bigger. So it is not an exit from India, it is a strengthening of our presence in India. This is the clear message that I want to give everybody and I gave today to my employees.

Back to the question about integration. The first thing I said this morning to our employees, using a football metaphor – I’m not into cricket – keep your eyes on the ball and don’t forget who is the competitor, who is the opponent. And I’m sure Kumar is doing the same. They have been very agile, we have been very agile commercially. Together our job is to make the best management team. Most agile, most reactive in the industry.

Will you commit to more capital and investment in this business?

Vittorio Colao: We are committed to invest whatever is needed to make sure that with this 1,800 MHz of spectrum and the largest network in the country and the largest customer base in the country, we deliver broadband services to the whole of India. I think this is the commitment of the two parties.

So you are committed to invest more capital in India?

Vittorio Colao: We are committed to continue to invest more in India.

Kumar Mangalam Birla: If I can add, I don’t think that, looking at the projections of the combined company, it seems that you would require a whole lot of capital. Because the self-generation of funds is very strong. But to echo what Vittorio said, both Vodafone and Aditya Birla Group completely stand behind this company, whether it’s in terms of management time, focus and obviously in terms of funds as well.

Mr Birla, you will need a considerable amount of capital to shore up your promoter stake in the merged entity, from the current 26 percent to an equal percentage – which is 35 percent. We estimate that to cost somewhere between $600 million for the first 4.9 percent stake and another $1-1.5 billion for the remaining 9 percent stake. That’s over $1.6 billion. How will you raise these funds over the next four years?

Kumar Mangalam Birla: So I think it is important to clarify, the second tranche of 9 percent is an option. It is not something we are committed to do, we would want to do but we’ll have to see how it goes, in terms of funding, for example. Vodafone has committed that if we don’t take up our holding, then the excess holding Vodafone has will have ‘restricted’ voting and they will shed the excess shareholding over a period of time so that we are equalised and we move ahead in true spirit of an equal partnership.

Where will you raise the funds from?

Kumar Mangalam Birla: We are not looking for funds from the listed companies of the Group, so it will have to come from the promoter-owned entities.

Your views on the entry of Jio and the competitive scenario?

Vittorio Colao: Thank you for this question because this is really the essence of it. Now of course you live in India and you see this Jio thing and everybody thinks this is a completely unseen and unprecedented phenomenon. It is a remarkable new competitor. But to be honest we have seen new competitors coming in many, many markets. Clearly, India is bigger so the commitment that the new competitor has made, in terms of money, is large. Eventually, they will need to start charging something and eventually they will need to have service and other elements of normal media and communication operations and that’s where our strength comes. Because we are a strong brand, we have strong distribution, we have strong care and we will have the biggest, and I hope the best, network in the country. So is it a tough competitive situation? It is a competitive situation but it is as tough as other situations you see around the world.

Kumar Mangalam Birla: Jio is comparatively huge, with deep pockets, great execution and not someone to be taken lightly, obviously. It’s basically about competing in the market and getting a share of the customer’s wallet.

(This article was originally published on BloombergQuint.)