MOSL: IDEA CELLULAR (Upgrade to Buy)-Vodafone, Idea get prepared to fight battle of capacity-Dominant position, synergy gains post-merger
​IDEA CELLULAR: Vodafone, Idea get prepared to fight battle of capacity; Dominant position, synergy gains post-merger to drive healthy EBITDA growth
(IDEA IN, Mkt Cap USD5.4b, INR98, TP INR120, 22% Upside, Upgrade to Buy)
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 merged entity is valued at 8.3x on FY19E with an EV of INR1,779b – Idea will issue shares at a swap ratio of 1:1 to Vodafone India shareholders. The deal will allow the merged company to command a leadership position in spectrum (with a 24% share) and broadband sites. This could lead us to revise up our revenue market share estimates (we have factored decline of 250-300bp for both the companies). The current sub-30% EBITDA margin could scale up to 36-39% over next 4-5 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 INR120, 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.
Deal contours in line with expectations: In line with our expectations, Vodafone will have 50% shareholding in the merged entity, implying a share swap ratio of 1:1. Pro forma net debt as of end-December 2016 is INR1,079b (Vodafone: INR552b, and Idea: INR527b), with an EV of INR1,779b at current price. The deal includes: 1) Idea’s consolidated entity, including wireless and tower businesses and 11.15% Indus stake and 2) Vodafone’s mobility business and standalone towers (but not its 42% stake in Indus). Idea’s promoters will buy 5% from Vodafone at a price of INR110/share, with effective shareholding of 26% and 45%, respectively. Additionally, Idea has the right to acquire additional 9.5% stake from Vodafone at a price of INR130/share over next four years to create equal shareholding of 35.5% for each promoter group.
Idea Cellular provides Global System for Mobile Communications (GSM) based mobile services and related telephony services to individuals and businesses in India. The company operates through three segments: Mobility Services, which provides GSM based mobile and related telephony services; International Long Distance (ILD), which provides international long distance services; and Passive Infrastructure, which provides passive infrastructure services. Co. offers 2G and 3G services that comprise roaming arrangements; ILD and other services; and a range of mobile broadband devices, including dongles and 3G smartphones that provide 3G applications and data services.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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