Telecom battlefield and the Idea -Vodafone merger: The fineprint decoded : 21 Mar 2017

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Aditya Birla-owned Idea Cellular and Vodafone India announced plans to merge the two entities, thereby creating the country’s largest telecom operator with nearly 35% market share. Idea Cellular ended down over 10% on the National Stock Exchange (NSE) on Monday at Rs 97 levels.

Here is a quick compilation of how leading brokerages and research houses across the country have read the deal’s fine print and their stock recommendation for Idea Cellular.

MOTILAL OSWAL RESEARCH

The telecom battleground is all set to intensify with Idea and Vodafone announcing to merge their businesses in a deal that will create a telecom giant. The deal will allow the merged company to command a leadership position in spectrum (with a 24% share) and broadband sites.

The current sub-30% EBITDA margin could scale up to 36-39% over next four – five years, led by synergies and scale benefits. Furthermore, reducing capex requirement and tower sale could lower leverage to around 4x by FY19E. We upgrade Idea to ‘Buy’ with a target price of Rs 120, implying 9x EV/EBITDA on FY19E for the combined entity. In our view, the rich valuation is justified, as the expected recovery from FY19 could drive EBITDA CAGR
of 18% over FY18-22.

EMKAY GLOBAL

In our view, upside (for Idea Cellular) is restricted by: 1) hyper competitive scenario with Jio expected to remain aggressive in race to gain revenue market share; 2) long dated cost synergies and; 3) lack of debt reduction in medium term. Progress on regulatory approvals would also be closely watched as both the entities have number of pending litigations.

RELIGARE INSTITUTIONAL RESEARCH

We believe the market is more than factoring in the upsides from Idea’s tower sale as well as synergy benefits for the entity. Though we model for a better EBITDA margin and synergy accrual in our combined pro-forma P&L for FY19, we believe the risk-reward remains unfavourable.

The transaction will take nearly two years to be completed and the annual $2 billion run-rate synergy estimated by both players will be achieved only at the end of the fourth year. We adjust our standalone estimates for Idea to factor in lower margins but value the company on a pro-forma post-merger basis to arrive at our March 2018 target price of Rs 90 (Sep’17 Rs 80 earlier), based on 6.4x FY19E EV/EBITDA. Maintain HOLD.

ICRA Ltd

The transaction faces many challenges and would take almost 1 year to conclude. The merged telco would breach the spectrum holding cap in 5 circles in 900 MHz band and in two circles in the 2500 MHz band; and likely to breach the revenue market share cap of 50% in six circles. These would have to be resolved in a fixed time frame.

Further, the debt levels of the merged telco would be high at around Rs 108,000 crore, which translates into a debt/EBITDA of approximately 4.4x.
Both the entities would have to inorganically deleverage to rein in the debt.

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