MUMBAI | KOLKATA: The whole world may have been slower than molasses in early January, still hungover from New Year celebrations, save for the trio at Aditya Birla Centre, the headquarters of the AB Group.
Sushil Agarwal, group CFO and Kumar Birla’s consigliere, along with Saurabh Agarwal, investment banking rainmakerturned-Birla’s strategy head, and Ashish Adukia, also a former banker who changed stripes to join the conglomerate as its corporate finance and M&A head, flew from Mumbai to London to the Vodafone Group headquarters to kickstart a merger conversation that was seeded last summer but had petered out.
Waiting for them on the other side of the table was another seasoned banker — Pierre Klotz, a former HSBC and UBS veteran who heads M&A at the world’s second-largest telecom company, along with his team.
Both sides knew the negotiations would be intense before a result could be achieved even as the dynamics of the competitive industry were changing faster than anyone had ever foreseen. Only a “mother of an idea” could have salvaged the day.
Ever since Mukesh Ambani’s Reliance Jio Infocomm stormed the market with free voice and data services last September and undermined industry revenue, the only way out was to join forces and consolidate.
Anil Ambani’s Reliance Communications had already teamed up with Aircel and an alliance between the country’s No. 2 player, Vodafone, and the third-largest, Idea, seemed the only logical way out.
“Though Vodafone and Idea had flirted in 2016, the talks actually turned serious around the beginning of this year,” said an official in the know.
“So getting the deal construct right was absolutely essential this time around.”
Both companies had, on their own, explored buying or merging smaller operations or assets like spectrum from Norway’s Telenor or Videocon, but those talks never fructified. In any case, these were puny operations; what was needed was grandiose.
ET spoke to multiple officials, advisers and lawyers from both sides to piece together the story of the $22-billion marriage. Nobody wanted to speak on record.
MARRIAGE OF EQUALS
It’s never easy when you are trying to combine and create an operation bigger than AT&T’s. More so, when one is bigger than the other. Most back-of-the-envelope calculations had estimated Vodafone India to be worth $3 billion more than Idea, including debt.
Both sides also had their conditions to make the deal value-accretive for their own set of shareholders. To begin with, it had to be a merger with equal rights.
Birlas wanted a minimum 26% in the combined entity and a chairmanship for Kumar Birla. Vodafone too wanted to deconsolidate its Indian operations. Having invested over $30 billion in India since 2007, its experience has been rocky, hamstrung with retrospective tax charges and write-offs. It was also toying with an initial public offering (IPO) for its India operations, so cherry-picking the right strategy to grow in a market like India was absolutely critical.
The initial plan was to merge the two wireless operations, like RCom and Aircel, but it wasn’t practical and was rejected.
To make the 50:50 JV work, it only made sense if Vodafone kept its 42% stake in Indus Towers out of the deal while Idea’s standalone towers and 11% shareholding in Indus were brought into the combined entity. Both have been looking to reduce exposure to tower assets, including selling stakes in the joint venture independently, and have said they still plan to do so before the merger gets consummated. “The construct took time and followed 4-5 days of intense brainstorming between Mumbai and London.
But once that was settled, the rest fell into place quickly. The intent was very clear and if one had to meet all the pre-conditions, there were not too many choices available in the first place,” added another official. “Both the operations also got valued at the same multiple.” The financial gap between the two has been shrinking in the past few months. “There is only a 10% gap in EBITDA (earnings before interest, tax, depreciation and amortisation) between Idea and Vodafone.
Of the two, Idea has been growing faster and its margins have also improved significantly. So it wasn’t all that tough,” recalled another executive. DOT THE I’S, CROSS THE T’S But it was tough to keep everything under wraps.
Media leaks in the UK and India in mid-January had forced both sides to make a joint statement by the end of the month, acknowledging the ongoing talks.
It was then that the plot thickened on the back of “really aggressive timelines”. Between Mumbai, London, Dubai and Abu Dhabi, the core team met a little over half a dozen times to stitch it all up.
“You have seasoned in-house bankers on both sides. It was left to them to dot the i’s and cross the t’s like infrastructure and manpower duplication, among other things.
Both Pierre and Saurabh have been seasoned telecom bankers and having worked on several such transactions are fully aware of the sectoral issues. Adukia too is no stranger to M&As,” said a senior lawyer privy to the discussions.
“No wonder, Birlas did not engage any outside bankers. Vodafone always does most of the initial work in-house and only then gets advisers on board. This was no exception.”
Once the overall construct was agreed upon, both sides engaged external advisers — Morgan Stanley, UBS, Robey Warshaw, Bank of America Merrill Lynch, Kotak Investment Bank and Rothschild; lawyers S&R Associates, Slaugter and May — to begin work on documentation. From February, the operations team from both the telcos were roped in and due diligence began.
“In a merger, human issues are the most sensitive. There are redundancies, frail egos. So you need to involve them at the right time.
It’s equally important to involve the right guys,” recalled another executive.
Operationally, both sides had already been busy taking stock. On March 15, the Vodafone India brass met along with Vivek Badrinath, CEO (AMAP) and executive committee member of Vodafone Group, to review the state of preparedness and other operational issues with regard to the integration. The following day, the Vodafone India board met in Mumbai to further discuss the merger.
Vodafone Group CEO Vittorio Colao and Klotz flew in on the evening of March 18.
“The past 48 hours have been frenetic,” quipped an executive. “Negotiations went on till 3 in the morning.” On Sunday morning, Colao and his team met with Birla and his deal team at their Worli headquarters to iron out the final contours.
A key issue still to be sorted out was naming the CEO, COO and the CFO.
They finally agreed that Thomas Reistien, CFO of Vodafone India, would continue in his role as would Balesh Sharma, Vodafone India’s newly appointed COO. As for the CEO, they both agreed on a candidate but chose not to announce the name as yet. Many senior Idea officials are on the verge of retirement, making it easier to manage the overlaps.
As an official put it: “We didn’t leave anything to chance for the last minute, but still had to discuss the script… the communication to employees, investors, employees.” As the meeting rolled on till evening, Birla also had to immediately meet and brief some of the board members.
With that out of the way, the Monday morning Idea board meeting and the townhalls were a cakewalk. The mega alliance of the airwaves was by then ready to face the world.