Idea merger has short-changed Vodafone shareholders: IiAS

The Idea Cellular-Vodafone merger may be set to create India's largest telecom company, but the deal has been less favourable for Vodafone shareholders as compared to the Aditya Birla Group, says proxy advisory firm Institutional Investor Advisory Services (IiAS).

IiAS believes that since Vodafone is larger than Idea Cellular, it should have had a stronger position in this deal.

"In allowing an equal relationship with Idea, Vodafone should have commanded a premium and better quality of control. But the deal contours favour Idea Cellular," the report said.

The report further points out that Vodafone has been generous in various other ways as well. It has allowed Idea parent AB Group a three-year 'standstill' period to equalize the equity stake, yet allowed Idea equal voting rights before stake equalisation.

"While this may be conducive to a harmonious merger, it has short-changed Vodafone PLC's shareholders of their voting rights," IiAS says.

As per the agreement, Vodafone has also granted a call option on 9.5 per cent of its equity without any premium. This enables the AB Group to acquire 9.5 per cent of the combined entity's shares at a predetermined value of Rs130 per share within the next three years.

If after three years AB Group does not buy this equity, Vodafone will still have to sell its equity stake till it equalizes with that of Birla.

"Therefore, if the price of Rs130 is not attractive, the Birla group will not exercise its option to purchase equity and Vodafone will have lost the opportunity to cash its holdings. This deal component not only allows AB the power to decide if the valuation is right, but also pivots the equalization to the group's holding."

While Vodafone will appoint the chief financial officer (CFO), the board chairmanship has been ceded to Kumar Mangalam Birla, the current AB chairman. The CEO and COO selection will be a joint decision.

On the whole, analysts say the deal was necessary for both companies as it prepares them from the competitive pricing onslaught brought on by Reliance Jio.

But in ceding most of its rights, Vodafone has stayed true to its tagline: ''Power to you'', IiAS said. While this is good for its customers, it is not good for its own shareholders, it added.