Is Vodafone's search for an Indian partner finally over?

Even three-four years ago, Vodafone was quite interested in merging with an Indian company

Vodafone Plc’s admission that it is in discussions with Aditya Birla’s group about an all-share merger of Vodafone India and Idea, on Monday, doesn’t come as a surprise to investment bankers.

Three years back, when an investment banker went to London to pitch for the company’s initial public offering (IPO), he had prepared a small note on how Vodafone can create value, improve spectrum efficiency and increase valuation by around 25% through a merger with one of the four existing entities – Bharti Airtel, RCom, Aircel and Idea.

“While we had created a small presentation on Indian companies that Vodafone can look at and the major focus was on the IPO, the Group chief financial officer and his team was more interested in discussing the merger and potential candidates. We had a 20-minute presentation, but we spent almost 90 minutes assessing the different players’ strengths and weaknesses,” says the investment banker.  

In fact, the investment banker admits that his team wasn’t prepared with answers to many questions that they were asked by the Vodafone management.

Three years later, Vodafone seems to be revisiting its earlier plans. “With RJio, trying to capture the telecom market with its aggressive plans, it is little doubt that there isn’t space for too many players and a big merger like this will come with many benefits,” says a fund manager.

Interestingly, globally Vodafone has been on a merger spree in the last few years. And it has been doing one multi-billion dollar deal every year. In 2013, it took over Kabel Deutschland, the largest cable operator in Germany. In 2014, it took over Spanish broadband and pay-TV firm Ono. In 2015, Vodafone announced a 50:50 joint venture with Liberty Global’s Dutch arm. In between, Vodafone sold its 45% stake in Verizon for a whopping $130 billion in September 2013.

In India, Vodafone bought Essar’s stake in Hutchison Essar Telecom Services in 2007. It has been embroiled in a tax dispute with the Income Tax department which has alleged that the transaction involved purchase of an Indian subsidiary, and hence, liable to taxation. The case is still going on. The company had also shown interest in Tata Teleservices in 2014.

“The uncertainty over tax liability has made it difficult to list in India. If this deal goes through, then it will automatically become a listed entity as Idea is listed on the bourses. It will also reduce the debt leverage of the combined entity,” says a fund manager. On Monday, Idea’s stock closed up 25%.