Vodafone's Big Idea
Vodafone CEO Vittorio Colao has negotiated a partial retreat from a tough situation in India on reasonable terms. Given a bloody price war brought on by a new rival, the deal to join forces with Idea Cellular Ltd is smart even though Colao has ceded control without getting a premium.
Vodafone Group Plc and Idea said on Monday that they would combine their Indian mobile operations to create the country's largest carrier with 395 million subscribers, vaulting the new company ahead of Bharti Airtel Ltd. At first, Vodafone and Idea will share ownership, although power will tilt towards the Indian side.
To get to that supposed ownership equilibrium, Colao and negotiating partner Kumar Mangalam Birla -- billionaire owner of Aditya Birla Group, Idea's biggest shareholder -- had to perform some serious contortions. Vodafone's India unit was bigger and worth more than Idea, so the pair each contributed assets, cash and debt to get to an equal contribution.
Both put in their mobile operations at roughly similar multiples of 6.4 times Ebitda for Vodafone and 6.3 times for Idea. That looks like a compromise on Vodafone's part since Idea's Ebitda has been falling faster than its own. Meanwhile, Vodafone has excluded its 42 percent stake in the Indian towers company Indus, while Idea has thrown in its 11.2 percent stake in that same entity, worth about $1 billion. Finally, Birla pays $579 million to buy 4.9 percent of the new company from Vodafone.
Colao can live with the fiddly structure, given that the big prize is $10 billion of cost savings within four years from combining the number two and three operators in the world's fastest-growing smartphone market. Vodafone and Idea will both benefit from those synergies, but how the bounty will be divided will depend on how quickly Idea ups its stake in the new entity.
As for governance, Vodafone ends up being the junior partner. Both sides get to nominate the same number of board seats and choose the CEO jointly, but Birla nominates the chairman. While that may seem unfair, the reality of doing business in India means having locals in charge should be a good thing. Vodafone's inability to end a long, acrimonious tax dispute with the government shows the problems foreign companies can face there.
The slightly lopsided power-sharing will make more sense if Birla later raises its stake, as it has the option to do under a shareholder agreement. Birla can buy up to an additional 9.5 percent from Vodafone in the first three years at an already negotiated price of 130 rupees per share. If it doesn't, then Vodafone can later begin to sell down to get to equal ownership.
Much of Colao's nine-year tenure at Vodafone has been spent undoing a global expansion undertaken by his predecessor. Its experience in India hasn't been happy as it racked up some 900 million euros of cumulative losses, prompting a massive write-down in November.
As he's shown in well-timed exits from the U.S and France, Colao is an unemotional seller. With the Idea deal, he's shown again that pragmatism beats pride.
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