Banking sources, however, said Vodafone group was wary with the huge losses of Idea since the merger was announced and had asked the AB group to fund the losses before the deal closed. As per the agreement, the net debt-to-Ebitda of the merged entity was not to exceed 6.5 times if the merger is completed by March 2018. However, the merged entity’s net debt-to-Ebitda is already about 6.5 times, and could go up further as the Ebitda of Idea would take a hit in second half of 2017-18 due to the cut in the interconnect usage charges announced by the telecom regulator.
In a recent report on Idea, analysts at JM Financial said, “As of September 2017, the pro-forma net debt of Vodafone-Idea merge-company was Rs 1,106 billion—implied leverage ratio being 6.6x based on trailing 12 months Ebitda. Even after incorporating Rs 155 billion of proceeds from tower-divestments (assuming sale of entire Indus holding by Idea), we estimate the leverage ratio would surge further to about 8x by March 2018, well ahead of the 6.5x MCLR (maximum closing leverage ratio) agreed by principal shareholders of the two companies.
” The analysts further said, “We think compliance with merger-conditions may be the primary factor driving the latest fund raising proposal.”
Consequent to the planned fund infusion into Idea, the stake of AB group in the company will increase from 42.4 per cent to 47.2 per cent. Consequently, AB group would end with a stake, which is higher than earlier anticipated in the merged entity. So the group will need to buy lesser stake from Vodafone to maintain its stake at 26 per cent in the merged entity.
“As a consequence of the change in shareholding in Idea following the capital raise, AB group and Vodafone have agreed that the AB group will buy a minimum of 2.5 per cent of the merged entity from Vodafone, or such higher stake required in order for the AB group to ultimately own at least 26 per cent of the merged entity. Consequently, Vodafone will receive minimum proceeds of Rs 19.6 billion from such sale and Vodafone’s ownership in the combined entity is expected to be approximately 47.5 per cent at completion,” Vodafone group said. In a statement, Vodafone said its stake in the combined entity in excess of 45.1 per cent would not be subject to any lock-in after closing (the merger deal) and Vodafone would be free to sell the relevant shares without restrictions.
In March last year, both had agreed to a standstill period for the first three years after closing, during which neither party was allowed to buy any shares from or sell any shares to a third party. Vodafone had then said that it would own 45.1 per cent in the combined entity after transferring 4.9 per cent stake to the AB group, enabling the latter to increase its stake in the new entity to 26 per cent. The option for the AB group to buy another 9.5 per cent stake to equalise its holding is also on the table.
An AB group official clarified that the group retains the right to buy 9.5 per cent stake in the merged entity from Vodafone, as announced earlier, to equalise their stake at a price of Rs 130 a share. The only difference is that Vodafone, which will hold 47.5 per cent stake in the merged entity, can now sell the 2.4 per cent to anyone instead of selling it to the AB group.
“The fund-raising proposal appears to be driven by merger conditions, and not by immediate cash crunch or any covenant breach,” said another analyst.
Vodafone said the proceeds from this capital raise, in addition to the Rs 78.5 billion of proceeds from the announced disposals of Vodafone India’s and Idea’s standalone tower businesses, would be used to strengthen the balance sheet of the merged entity. Based on Idea’s net debt as on September 2017 of Rs 567.6 billion, adjusted for the additional equity announced on Thursday, Vodafone India’s net debt contribution would have been Rs 524.8 billion, it said.
Given Vodafone India’s net debt position of Rs 618.3 billion as on September 2017, this would have implied a need for Rs 93.5 billion of additional equity funding by the Vodafone group. After taking into account the minimum proceeds to be received by Vodafone from the sale of a minimum of 2.4 per cent of the combined entity to the AB group at completion, the net funding contribution by Vodafone group would have been Rs 73.9 billion. Late last year, Idea and Vodafone raised Rs 78.50 billion through sale of their standalone towers to American Tower Corporation.
Idea’s shares jumped 3 per cent following the announcement and closed almost 2 per cent above opening numbers at Rs 104.50 on Thursday.