British telecoms group Vodafone and India-listed mobile network operator Idea Cellular have agreed to combine their Indian operations to create the South Asian country's largest telecom operator.
The two companies are the second- and third-largest players in the market respectively. As they merge, the combined entity will have almost 400 million customers and a 41 percent revenue market share.
Vodafone will own 45.1 percent of the combined company after transferring a 4.9 percent stake to the Aditya Birla Group for 39 billion rupees ($598 million; €553 million) in cash. Aditya Birla, the majority shareholder of Idea, will then own a 26 percent stake in the company and have the right to acquire up to a 9.5 percent additional stake from Vodafone under an agreed mechanism. Idea's other shareholders will hold the remaining 28.9 percent stake.
Vodafone and Aditya Birla will jointly manage the new entity, the name and brand strategy of which will be changed and developed in due course.
The merger ratio is in line with recommendations from the joint independent valuers, said Vodafone. Vodafone's Indian unit has an implied enterprise value of 828 billion rupees, and Idea is worth of about 722 billion rupees.
Aditya Birla said capex by the new entity will accelerate the expansion of wireless broadband services and help introduce digital content and the Internet of Things across the country. The company will also have sufficient spectrum to compete with other major operators in the market, according to the Indian conglomerate. It would hold 1,850MHz of spectrum and be able to build substantial mobile data capacity by utilising India's largest broadband spectrum portfolio, with 34 3G carriers and 129 4G carriers across the country.
Prior to the transaction's completion, Vodafone and Idea plan to sell their standalone tower assets and Idea's 11.15 percent stake in Indus Towers, India's largest telecom tower company, to reduce leverage in the combined group. Vodafone also owns a 42 percent stake in Indus Towers, for which the company hopes to explore exit options including a partial or a full disposal.
The transaction is expected to close in 2018.
India's current largest telecom operator, Airtel, is owned by Indian conglomerate Bharti Enterprises and Singapore's SingTel. Last month, it agreed to take full ownership of Telenor India, a smaller player with a customer base of 44 million.