Ind-Ra: Linkages with Parent - Vodafone Group Plc May Moderate Post Vodafone-Idea Merger

The operational and strategic linkages between Vodafone Mobile Services Limited (VMSL; 'IND AAA'/RWE) and its parent - Vodafone Group Plc (Fitch Ratings Ltd; Issuer Default Rating: 'BBB+'/Stable) may moderate post the merger of VMSL and Idea Cellular Ltd (Idea), says India Ratings and Research (Ind-Ra). Last month, Idea and Vodafone Group Plc announced the amalgamation of Idea and Vodafone Group Plc's Indian operations, excluding its investment in Indus Tower.

Ind-Ra is in the process of assessing the benefits of the synergy and the revised business and financial profile to arrive at the standalone assessment of the merged entity. While evaluating the standalone profile of the merged entity, Ind-Ra will factor-in the inherent risk of the industry, such as capital intensive, intense competition, technology and regulatory changes.

The agency is evaluating the standalone credit profile of the merged entity, and is in talks with the management to assess the timing and the likely synergies of the deal. The agency is likely to complete its assessment over the next few weeks. On 7 February 2017 India Ratings Placed Vodafone Mobile Services and its NCDs on RWE. Ind-Ra placed VMSL's ratings on RWE awaiting further clarity on the post-merger shareholding structure, group structure, operational and management control and the likely impact on its credit profile.

As per the contours of the announced deal, Vodafone Group will jointly own and manage the merged entity along with the promoters of Idea Cellular. Immediately post the all share deal, Vodafone group will sell 4.9% stake to the promoters of Idea (Aditya Birla Group; AB Group) to bring the shareholding to 45.1% from 50%. The amalgamation scheme provides for a mechanism to equalise the shareholding between Vodafone and the promoters of Idea. Until, the shareholding is equalised, both will have equal voting rights.

The scheme also provides a right to AB Group to buy additional 9.5% from Vodafone Group over the next four years after completion of the amalgamation. It provides for Vodafone to offload surplus shareholding in the market over five years after the completion of four years from the amalgamation date to bring its shareholding at par with the AB Group.

Both the JV partners will have rights to appoint three directors each, while AB Group will have the rights to appoint the chairman and Vodafone Group will have rights to appoint the CFO. CEO and COO would be selected jointly on the 'best person for the role' principle.

The scheme is subject to shareholders, creditors, lenders and regulatory approvals, and is envisaged to be completed within a period of two years from the announcement date.

While assigning the rating to Vodafone Mobile Services Ltd, Ind-Ra had taken a top-down rating approach, on the back of the strong strategic linkages and moderate-to-strong operational linkages Vodafone India had with its parent - Vodafone Group Plc.

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