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Vodafone Idea merger to save Rs 7,000 cr per year; one-time cost Rs 3,000 cr

The Idea Cellular-Vodafone merger announced today will save about Rs 14,000 cr in operating expenses per year for the combined entity after four years of merger, the two companies said.

However, due to the applicability of spectrum caps on the combined entity, the deal will also cost Rs 3000 cr in present value in terms of costs associated with surrender of overlapping spectrum.

In several states, both Idea and Vodafone have copious amounts of spectrum in the 900 MHz band, and the merger will require them to surrender between 1 to 3 MHz to the government or sell the same within one year.

SAVINGS

In terms of savings, the two companies would be able to either halve the number of towers and base stations that they have, or double their capacity, without much more capital expenditure due to the merger.

They will be able to pool their fiber network, equipment and spectrum to achieve greater efficiency.

The operational efficiency expected to be generated in perpetuity due to the merger is worth Rs 70,000 cr at present, after excluding all integration costs, the companies added. Operating cost savings will comprise 60% of the expected run-rate savings, they added.

PARTNERSHIP OF EQUALS

Both Vodafone and Aditya Birla Group will have the same voting rights from the beginning, and eventually, the same equity stake in the combined entity.

The two companies have agreed not to buy or sell any shares of the merged company to a third party for the first three years to give a chance for the Aditya Birla Group to equalize its shareholding with that of Vodafone.

Immediately after the merger, Vodafone will sell 4.9% of its 50% stake to the Aditya Birla group at a price of 3,875 cr.

As a result, Vodafone will have a 45.1% stake, the AB Group 26% and the public will hold the remaining.

Over the next three years, AB Group will be able to purchase a stake of up to 9.5% from Vodafone at price that values the merged company at Rs 94,600 cr (US$14.1 billion) or Rs 150 per share.

After the above transaction, both parties will own about 36% of the combined entity at the end of the third year.

If Aditya Birla Group is not able to buy the 9.5% in time, it will get one more year provided it informs Vodafone how many shares it wishes to acquire.

If it still doesn’t manage to buy enough shares, Vodafone will have to dispose of some of its shares to equalize its shareholding with that of the Aditya Birla Group over the following five years.

While Aditya Birla Group will get to choose the chairman of the company, Vodafone will be able to appoint the CFO. The appointment of the CEO and the chief operating officer will require the consent of both, who will both have equal voting rights in the company irrespective of their shareholding.

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