If Idea-Vodafone use a structure to have joint control, it can open the tap to a large source for funding, which will help the merged entity effectively compete in the marketplace
The Idea-Vodafone combine will invest about Rs60,000 crore in the next three years to ramp- up its infrastructure, according to a Mint report.
This fiscal year, Idea Cellular Ltd and Vodafone India Ltd are estimated to spend Rs14,000-15,000 crore on capital expenditure, which means spending on infrastructure may rise significantly. Of course, one way to look at this is that the two companies are playing catch-up. Bharti Airtel Ltd is already spending around Rs22,000 crore on capex for its India wireless business, and Reliance Jio Infocomm Ltd’s spend on infrastructure has been higher this year.
But a moot question is—where will all this money come from?
Idea’s cash profit in the December quarter was next to nothing, or Rs20 crore to be precise. It is unlikely Vodafone is doing much better on this count. Unless things improve materially on the operational front, the merged entity will need to look to other sources for cash to fund its ambitious capex plans.
To be sure, they have started in earnest. The two companies have already sold their stand-alone towers; Idea has made fresh equity issuances, and Vodafone will bring in fresh equity at the time of or just before the completion of the merger. These fundraising efforts will add Rs24,000 crore to the kitty, which will take care of a little over a year’s capex.
Sure, there’s more to come. The proceeds from the sale of Idea’s stake in Indus Towers Ltd will flow to the merged entity, and may fetch around Rs8,500 crore. And finally, the two companies expect meaningful synergy benefits to flow in right from the first year of operations.
Even so, the merged entity’s liquidity position and gearing assumes some degree of improvement in the underlying business. Answering a question on the high gearing, Nick Read, chief financial officer of Vodafone Group Plc, said on a 1 February call with analysts, “Yes, it does rely on the direction of the market. We think the current position is an unsustainable one because we’re underneath cost for all players."
He added that in the event further funding support is required by the merged entity, it can fall back on its 42% stake in Indus Towers. “We’re confident that any support that may be required on funding going forward, we’ve got the Indian tower assets... we have a sizable Indus stake sitting over in India and, of course, we said all along that’s a stake that could get liquidated over time and we’ll see what we do with the funds," Read said on the call. Vodafone’s stake in Indus isn’t part of the deal, and the existing plan is to repatriate proceeds from the sale back to the parent.
But it may well make sense to reinvest some of this back into the Indian telecom business. Apart from the need to build infrastructure, there may also be a need to acquire spectrum to improve the competitive position in the market.
Analysts who have spoken to Vodafone say the company is not inclined to reinvest its Indus sale proceeds, unless push comes to shove, given the large write-offs it has already taken.
Another constraint is that additional investments by Vodafone will upset the shareholding calculations in the merger agreement. Idea’s promoters have said from day one that the merger is based on equal rights between itself and Vodafone. The plan is that both investors end up with equal shareholding in the merged entity within a specified time frame.
But equal rights needn’t necessarily mean equal shareholding. The two companies can take a leaf out of the books of Singapore Telecommunications Ltd (Singtel), which is the largest shareholder in terms of effective economic interest in Bharti Airtel. Singtel doesn’t enjoy control of the company, however, because of the use of a holding company structure, in which it isn’t the largest shareholder. Apart from its stake in the holding company, it also has direct stakes, resulting in higher economic ownership.
If Idea and Vodafone use a similar structure to have joint control, it can open the tap to a large source for funding, which will help the merged entity effectively compete in the marketplace.