2018- The Year of Explosive Mergers

Voda-Idea is the next biggest merger that is about to happen


Flipkart meets Walmart in the world’s biggest merger

May 9 witnessed world’s largest e-commerce deal when the American multinational retail giant Walmart bought 77% stake in the largest e-commerce player of the Indian subcontinent, Flipkart. Little did the world know that what started as an initiative of two young minds with a mere capital of Rs. 4,00,000, will today crack a deal worth a whopping $16 billion (about Rs. 1.05 lakh crore).

The growth of Flipkart over the past 11 years can be attributed to their quality of service provided that has induced a deep-rooted trust for themselves amongst the general public. The e-commerce sector has become popular only in last 5-6 years in the Indian economy which ensures its undiscovered channels of growth and investment in the country. The e-commerce market will account for 2.5 percent of India’s GDP by 2030, growing 15 times and reaching $300 billion, a report by Goldman Sachs said. Thus the availability of a lucrative market along with the support of the mega e-commerce player has eased the process for the US retail corporation to place firm feet in the Indian retail market along with providing tough competition to arch-rival Amazon. The acquisition had taken place after multiple speculations of Amazon and Flipkart merging to form a monopoly in the sector, thus becoming capable of hurting the users and employees.

Details of the deal

As a consequence of this deal, CEO Sachin Bansal exit the company whereas SoftBank, which happened to be a 20-22% stakeholder in the Indian e-commerce giant, sold its stake to Walmart. News has it that Walmart could launch the Flipkart IPO (Initial Public Offering) at NASDAX in as early as 4 years. Walmart stated that minority investors holding 60% of Flipkart shares “acting together, may require Flipkart to effect an initial public offering” after the fourth anniversary of the transaction close at a “valuation no less than that paid by Walmart under the Share Issuance Agreement”.

Initially, the new Flipkart board will have 8 directors as stated by Walmart Inc: five to be appointed by Flipkart, two will be appointed by the minority shareholders and one founder i.e. Binny Bansal. An acquisition implies a larger market share and the caliber of meeting a greater demand. This could eventually lead to widespread employment in the field of logistics, delivery or maybe warehousing in India. Basically, only time can tell if the largest e-commerce deal on the planet was worth the money and media buzz.

The Voda-Idea merger

Beware! Do not wrong yourself by believing that the aforementioned is solely the most astonishing deal of the year. India will soon be host to one of the biggest deals in the telecommunications sector, a mega-merger of Vodafone India and Idea Cellular, the announcement of which was made on March 20, 2017, but all clearances will probably be received in the next few weeks. The merger is worth $23 billion as quoted by The Reuters.
The Department of Telecommunications (DoT) may soon clear the prospective merger but only after both the companies have cleared their dues, namely their one-time-spectrum-charges (OTSC). The Financial Express claims that the DoT might ask Vodafone for Rs. 5,650 crore – or a bank guarantee – and Idea for Rs. 2,113 crore for its OTSC dues.

How big will the merged venture be?

This merger will thrust the chief competitor Bharti Airtel to number 2 to become the largest player in the telecom industry. An initial instinct after the merger could be to battle the minimal rates asked for by Reliance Jio and attain the highest possible subscriber count (about 39 crores for VodaIdea as indicated by The Financial Express) in the country.
Talks of a probable merger of Reliance Communications, Tata Teleservices, and Aircel have also rounded grounds. This means that the Indian Telecommunications market may just have three major players. It can thus be induced that not only will the quality of services be improved in the newly formed oligopoly telecom market, but also raise prices demanded for services in this sector. The sector may flourish due to the possession of an expanded pool of resources under a single purview, leading to a reduction in financial complicacy and thus higher revenues.

Why does the telecom industry need this merger?

But why have this merger in the first place? Is it because of the need to compete with the rising popularity of Reliance Jio or because both Vodafone and Idea weren’t able to manage their debts individually and felt the need to merge, or maybe both? The two companies have a combined debt of about Rs. 1,20,000 crores and are currently running in losses. The merger can reportedly save costs up to $10 billion in four years.

“The merger may see Vodafone India be the leader as it will own 45.1% of the combined company after transferring a 4.9% stake to the Aditya Birla Group for $579 million in cash, concurrent with the completion of the merger. The Aditya Birla Group will own 26% of the combined company and Idea’s shareholders the remaining 28.9%.” as quoted by Idea itself.

The merged company will have a customer market share of about 42%, a revenue market share of 37% and a combined share of the spectrum of 1850MHz, making it the second largest telecom venture in the world. The new company will together decide its CEO and COO but the decision of appointing the CFO will be in the hands of Vodafone. As for the chairman of the new company, it was agreed upon by both the telecom firms to let Mr. Kumar Mangalam Birla host the post.

As for now, the merger appears to be a win-win for Vodafone and Idea. But is this just a short-term hallucination or a long-term truth, only time can tell.

For now, it is safe to say that 2018 will be a year of new beginnings and shocking mergers with the two aforementioned being just the beginning.

Author | Shubhangi Gokhroo