Merger with Idea: Vodafone goes defensive with its India play

The Indian operation will cease to be a subsidiary for the British parent

British telecom giant Vodafone plc would be hoping to bring an end to the problems it has faced since it bought Hutchison's stake in the company a decade ago.

Since Vodafone made its $11.1 billion acquisition of Hutchison’s operations in 2007 and paid another $5.5 billion to buy out Ruia’s stake later, the British company has seldom made money on its India operations and had to take two large impairments. Last year it invested another $7.2 billion. Vodafone has invested over $24 billion in India.

Apart from buying stake, Vodafone plc invested billions of dollars to buy spectrum in India over the years and, of this, it invested a massive Rs 20,000 crore or around $3 billion in 2016 alone.

Besides the large investments that the Indian operations have demanded, Vodafone has been entangled in legal battles with the Income Tax department with over $2 billion in dispute.  

Vodafone: A tumultuous India journey

2007: Buys Hutch's 67% stake for $11.1 bn

2011: Buys Ruia's 33% stake for $5.5 bn

2010: IT department raises Rs 8,000 cr tax demand against Vodafone on Hutch deal

2012: SC rules in favour of Vodafone against IT tax demand

May 2012: India changes IT laws with retrospective effect

2016: Tax demand balloons to Rs 14,600 cr

2016: Vodafone takes Euro 6.3bn impairment on India

2017: Vodafone merges its operations with Idea, to hold 45% stake in merged entity

The merger with Idea suggests that Vodafone is taking a step back as far as its India plans are concerned. For Vodafone plc, its stake in the merged entity will reduce to 45 per cent now, and the Indian operation will become an associate company and cease to be a subsidiary for the parent. In the next four years, it would sell another 9.5 per cent stake and reduce its holding to 35.5 per cent.

Vittorio Colao, CEO, Vodafone plc, had said when the company made an entry into India in 2007, it had 26 million customers and 16-17 per cent market share. Since then, the company has increased its customer base to 200 million with a market share of 22 per cent. “Today we handle more data in India than anywhere else in the world,” Colao said.

Though statistics support Vodafone’s growth in terms of customer acquisition, the company was hit on many other fronts: It was slapped with a tax demand by the Income Tax department which wanted to impose capital gains tax on the Hutch-Vodafone transaction. As the entire transaction was signed among Hutchison and Vodafone’s offshore entities, Hutch did not pay any tax and exited in India thus leaving Vodafone holding the can. By 2016, the tax demand shot up to Rs 14,200 crore along with interest and penalty.

Vodafone moved the court against the Income Tax department and  received a favourable order in the Supreme Court in January 2012. But in a controversial move in May 2012, the Indian government changed the Income Tax law and taxed the transaction with retrospective effect. The matter is now pending in the international arbitration court.

When the richest Indian Mukesh Ambani entered the Indian telecom last September by offering free voice calls and cheap data to Indian customers, incumbents including Vodafone were pushed to the wall. Ambani’s investment was a massive Rs 1,50,000 crore. In five months, Jio garnered over 100 million customers -- hitting the existing players hard. Jio also complained against Vodafone with the telecom regulator Telecom Regulatory Authority of India, which fined it Rs 1,050 crore along with Bharti Airtel and Idea for not providing it with adequate points of interconnect (PoI). The matter is now pending at the higher court.

By November last year, Vodafone took a 6.3 billion euro impairment charge on its India operations. This was its second write-down after 2010. “It’s very hard to compete with someone who gives stuff for free. That said, any company that gives away free stuff is not a company but a charity,” Colao had said soon after the impairment. This was after its $7 billion additional investment in its Indian subsidiary to buy additional spectrum to take on Jio.

With its merger with Idea, Vodafone plans to deconsolidate its India operations, its India-related debt worth Rs 55,200 crore and get a listing on the Indian bourses. Vodafone would also receive cash worth Rs 3,900 crore from the Birlas who would increase their stake to 26 per cent. Vodafone also has an option to sell its 9.5 per cent additional stake in the merged entity to Birlas in the next four years at a higher valuation so that both partners hold equal stake in the company. By reducing its India debt and cash received from Birla group, Vodafone group's reported leverage would reduce by around 0.3 times of net debt/Ebitda.

Colao said today that the company has the option to sell its 42 per cent stake in Indus Towers. The Idea transaction is expected to be accretive to Vodafone's cash flow from the first full year post completion of the deal.