20 March 2017
In an interview with Kumar Mangalam Birla, Chairman, Aditya Birla Group & Vittorio Colao, Vodafone Group PLC speaks about the Vodafone-Idea deal contours and roadmap for future. Edited excerpts:
ET Now: How did it all start, I mean we obviously know what the trigger for this transaction was but how did it all start, who made the first move?
Kumar Mangalam Birla: It is important to underlying the fact that the transaction primarily is driven by the industrial logic of both of these companies coming together. If you talk about leadership in 21-22 circles, market share of 40% on an all-India basis, customer share of 35% for both the entities together, so on and so forth, I think that has to be the foundation of any equal partnership. The fact that you had competitive intensity grew up in last few months, is always a trigger which can possibly expedite something like this but it is fundamentally driven by the fact that both these companies have complementary assets in terms of spectrum, in terms of the network, in terms of channel partners, so on and so forth. We believe that this is going to be a very compelling story for our shareholders, for our employees and for the country at large.
ET Now: Your intent was to create a merger of equals and yet financially that is not happening at this point in time. So from Vodafone’s point of view, what do you see, you are willing to give a call option to your partner, your pairing down stake if need be, have restricted voting rights for the period of three to four years, what is in it for Vodafone?
Vittorio Colao: First of all, as Kumar has just said the intent is to create a real partnership. To create a real partnership, you need to co-manage and to have the same rights. So, the decision was that that would be through from day one. From day one, we will be completely equal.
Now, of course, we start with a higher share than what the Birla Group has but over time, the two will equalise and we have made a commitment that we will not vote the excess shares to respect the spirit of the partnership. As Kumar has said, the industrial logic is so strong if we complete at same play, they are stronger where we are weaker and we are stronger where they are weaker that just by going together we can give in metro, in rural, in urban, a much better service to the customers for both and this is the real foundation of our partnership.
ET Now: You were very clear that you did not want your group companies to participate in the transaction because if they had, you could have arrived at an equal financial partnership as to start with.
Kumar Mangalam Birla: Let us be clear about the fact that we are buying from them at the time of closing of transaction at the closing price of the stock on Friday evening which takes us to 26%, over a period of time we have the option of going up to 35%. Vodafone in case we choose not to go up to 35% we will pair their shareholding so that we both at an equal level of holding.
In any case from day one, like Vittorio said, this is a partnership of equals with joint management control. It is also important to say that the whole spirit is one of an equal partnership, which is why, it's important to have equality in partnership in terms of equities as well and Vittorio mentioned this.
The excess shares that Vodafone has over those of the Aditya Birla Group will be restricted in terms of their voting till we equalise. It is also important to say that as per the valuation that was done by independent valuers, both Vodafone India and Idea were valued equally. So, it is a 50-50 joint venture in that sense. Idea being a listed company, the share of the promoters obviously is smaller as compared to the share of Voda in Vodafone India.
ET Now: Did you consider the option of getting a financial investor as well that could have brought your stake down and then all two of you would be at equal level or do you think that did not make sense at this stage?
Vittorio Colao: No because as we said both, I think we are both operators. We really have in industrial logic and we find that the logic of putting spectrum together, the logic of being able to create a champion for digital India is the industrial logic. Now, the Birla Group has done a lot in this business but also in other businesses to promote advancement of India. We have done a lot. We have invested a lot into digital India.
So, the logic was let us come up together with this and you asked before who came first. I do not think we cannot say who came first because Kumar and I have been in discussions for many years. Many years ago, you invited me for a lunch at your house and over time they developed strength, we developed strength and the logic became apparent and obvious along the way.
Kumar Mangalam Birla: Like I have been saying in the last few days I think that this is an idea whose time has come. So, there is no right timing but I think this is great timing.
ET Now: The stake of 4.9% that you are buying right now, is it being bought by the promoter entity, is it being bought by group entities and subsequently as well as the option of increasing your stake, will it be done only by promoter entity and not by group listed entities?
Kumar Mangalam Birla: I would like to clarify that both of these tranches of purchases by the promoters will be by promoter owned entities and there is no contribution envisaged by the listed group entities.
ET Now: The price that has been arrived for the call option if it were to be exercised at Rs 130 a share, how did you arrive at that price because four years from now it is tough to predict how the landscape of the industry would change, how did you arrive at the price of 130.
Vittorio Colao: You really asking two different questions and maybe we should split the answer so how will the landscape look few years from now and how do we get to the price and the answer is very, maybe I can help in saying India will have five strong players. We clearly be one of the leading ones but our objective is give the Indians sustainable choice across five solid long-term competitors.
You asked me how the market will be in five years time, I think it will be much better than today. It will be richer. Indians will get more broad band 4G plus would be almost everywhere. Financial services will be almost everywhere and more content and more applications will flow through these networks.
So, can I see a better market five years from now? Yes. What we can tell is that we have incorporated in the price of the additional 9.5, of course, a part of the synergies which are significant and is what will allow us to get to nice scenario five years from now in a very good shape.
ET Now: You want to add to that and also this escalation of your stake, will it happen in one shot, will it be staggered, you have the option of doing that?
Kumar Mangalam Birla: I think, yes there is an option built in so we obviously would want to do it over a period of time, so two years, three years as the case might be. In terms of the pricing of the option, I think what has been done is the basis of the stock price has been the stock closing price on the day before the leak announcement, which is actually in many ways we believe the actual sort of imputed value of the stock if I can call it that for want of a better word and there is a huge premium built into that.
It is about 80%, which takes into account, some of the synergy benefits that Vittorio spoke about that is very broadly. I mean do not sort of catch me on this later in terms of nitty-gritty but that has broadly been the basis for calculating the price that we have come to.
ET Now: In case if the Birla Group is not interested in selling, in hiking its stake, then you sell it to a third party, how will that transaction work?
Vittorio Colao: We have the spirit and we also want to have the actual structure of an equal partnership so, of course, we will keep the shares until the Birla Group has the right to exercise and to tell us what to do and then whatever will remain as excess, not taken we will overtime over a decently long period of time dispose off but we will maintain the same level in order to preserve the spirit of the partnership.
ET Now: Cultural issues, any merger is tough, this is a complicated merger because you are trying to be equal partners even though financially you are not even partners, to start with Vodafone is a British, sort of MNC, Idea is a sort of Indian conglomerate, large conglomerate that sort of has a legacy of its own. How difficult will it be for the two organisations to integrate culturally?
Vittorio Colao: You are right, integrations are never easy. Let me say this from the Vodafone point of view, we have done in the last three years a number of integrations in a number of counties both in Europe and outside Europe and all of them work in our experience if there is one common factor in the culture and it is a deep focus and the deep passion for the customs.
What we have achieved going from 26 million to 200 million customers, what they have achieved reaching 180 million customers can only be done if you really have a strong focus on the customers and I have to say this is the greatest guarantee that the two companies will integrate well and then we will learn from each other.
We will learn from the international and the multi-business nature of the Birla Group and they will get state of the art, telecom, culture from everywhere in the world. So, this is a marriage in heaven. We are creating a great leader for a future of digital India which three, four, five years from now I am convinced will look much better than what it was one year ago.
ET Now: You call it a marriage in heaven. The Birla Group has never done a deal like this. How tough was it personally for you to take this decision because it is on the face of it, the synergies are obvious and financially it might make sense but personally for you how tough was it for you to get into a deal of this nature?
Kumar Mangalam Birla: It is most logical thing to do. Like we have said, many times in the past that our role as promoters, as management is to maximise shareholder value and this seemed to be or I believe it is the best way to do that. So, in fact, I think that this is something that is perhaps a natural trajectory for Idea. I would say for Vodafone as well. I think, that it is the nitty-gritty of it that takes time to hammer out.
ET Now: Branding, what happens to brand, what will be the merged entity be called and what happens to the brands?
Vittorio Colao: Well, first of all what happens to the brands in practical terms will be professionally defined by the management of the merged company but I think what Kumar and I can say today both Vodafone and Idea brand will stay in the market. In what, I would say graphical or iconic graphic combination that we do not know today but I can guarantee to whoever is distributor, a partner, a dealer of Idea or Vodafone keep investing because from two A teams, you are now going into an A plus team.
ET Now: So it will not be Vodafone alone that you are saying…
Vittorio Colao: It will not be Vodafone alone. It will not be Idea alone. We will do whatever is the best for the customers and for the company.
Kumar Mangalam Birla: It is important to understand here that both brands have got a great cache on their own.
ET Now: How is it going to work out as Bharti Infratel has a right of first refusal, have you initiated talks at all and by when will that get done?
Vittorio Colao: Even on this one, we have aligned interest. There is a common stake of 11.5% that the company will own. There is Vodafone stake of 42% the company Vodafone company owns and of course we have a partner. I think, the three of us have the same interest which is maximise the value of that how we will do it, well we will look at alternatives and we will decide whatever is in the best interest. As far as Idea and Vodafone are concerned, we are completely aligned. We want to maximise the value of both holdings.
ET Now: How do you still deal with the competitor who seems to have an endless reservoir of cash and the landscape of the industry has changed over the last six months, you are there in markets around the world, how do you deal with the competitor who appears to have this endless reservoir of cash?
Vittorio Colao: Everybody sooner or later needs to start charging. Nothing is free including oxygen and so eventually they will have to charge for something and then the answer is this combination we have huge amount of spectrum. We have a great customer base. Two fantastic brands. We will be definitely in a good position and we will be happy to compete with the competitor you are referring to but also the other four, three, that remain in the country which are also pretty remarkable players worldwide. So India will have strong competitors three-four years from now and the customers will get benefit from this.
ET Now: Vittorio says four years from now the industry will be in a much better shape. You have been invested in telecom for years now and you continue to invest. You still believe that it is a long-term bet and from three-four year point of view how do you see the industry’s landscape changing?
Kumar Mangalam Birla: I am not good at crystal ball gazing as you probably have figured by now but I obviously believe that the industry in three or four years from now will be in a much better place.
ET Now: You anticipate sort of any roadblocks by your competitors because it is a competitive market, fractious industry or are you hopeful of a smooth sailing from here on?
Kumar Mangalam Birla: I believe that the M&A guidelines set out by the DOT are very clear, very clearly defined with no ambiguity and therefore we are very confident that this will go through as long as we are compliant with the rules and the regulations with which both of us have every intention to be as we always have been in the past.
Vittorio Colao: No, I just agree we will comply with the regulations and again it is in the interest I think of government, if Digital India is a priority. It is in the interest of the country to have a strong digital player and in the end it is also in the interest of competitors that we are all focussing our investment and viable and focussing our investment to bring broad band everywhere in India and not just in certain areas. This transaction allows nationwide rollout of broadband 4G, 4G plus, 5G so I do not think it is in anybody’s interest to really stop this merger.
Dr. Pragnya RamGroup Executive President, Corporate Communications & CSRAditya Birla Management Corporation Private LimitedAditya Birla Centre, 1st Floor, 'C' WingS.K. Ahire Marg, WorliMumbai 400 030.
91-22-6652 5000 /2499 5000
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