Emkay Idea Cellular

Update
Event
Research Idea ‘spices’ up; Neutral on valuations
th
25 June 2008
Idea Cellular has agreed to acquire Spice group’s 40.8% stake in Spice
Communications at Rs77.3 per share. Idea would also pay Rs5.44bn to the Spice
BUY group as non-compete fee. Telekom Malaysia International (TMI) which owns 39.2%
stake, would swap its holding in Spice at a ratio of 49:100 (132.5mn shares of Idea
to be issued on swap of 39.2% stake). Idea along with TMI would make an open
Price Target Price
offer for additional 20% stake in Spice Communications at a price of Rs77.3 per
Rs102 Rs156
share. The deal at a price of Rs77.3 per share values Spice at consensus FY09E
Sensex 14,220 EV/EBIDTA of 18x. However, considering the entire deal proceedings including the
share swap and preferential issue to TMI, the valuations of the merged entity would
be at par with the current valuations of Idea, making it a highly synergistic and a
Price Performance valuation neutral deal. This transaction not only enables Idea get a ready presence
(%) 1M 3M 6M 12M in the two circles, but has also enabled Idea raise ~US$1bn for funding its growth
and expansion without an impact on existing valuations.
Absolute (7) 4 (22) (15)
Rel. to Sensex A synergistic merger
7 19 10 (13)
The merger between Idea and Spice is highly synergistic as (1) Idea gets ready presence
Source: Bloomberg
in both Karnataka & Punjab circles (2) Idea has saved atleast 30-36 months time vis-à-vis
green field rollout (9-12 months for network rollout, atleast 18-24 months for EBIDTA
break-even, in addition to waiting time for spectrum allotment). Moreover Idea would have
Stock Details missed the ongoing robust growth potential due to delays on account of green field rollout
Sector Telecom
(3) Spice currently makes ~25% EBIDTA margins in the two circles and Idea can bring
Reuters IDEA.BO substantial operating efficiencies due to its expertise and scale benefits.
Bloomberg IDEA@IN
Valuations prima facie look expensive, but the deal isn’t
Equity Capital (Rs mn) 26354
The acquisition of Spice Communications by Idea Cellular at Rs77.3 per share implying a
Face Value (Rs) 10
valuation of 18x EV/EBIDTA for FY09E looks expensive prima facie. However
52 Week H/L (Rs) 161/89 considering the entire deal structure involving preferential allotment to TMI and the share
Market Cap (Rs bn) 269 swap, the deal turns out to be valuation neutral at the same time enabling Idea raise
Daily Avg Vol (No of shares) funds for future expansion. While Idea would buy Spice group’s 40.8% stake in Spice
12464482
Communications, the open offer would be made jointly by Idea and TMI. The equity
Daily Avg Turnover (US$ mn) 30.9 dilution and net cash in-flow to Idea depend on the extent of participation by Idea and TMI
in the open offer. However, Idea management has indicated that TMI’s stake in Idea
would not exceed 20%.
Shareholding Pattern (%)
(31st Mar.’08) If Idea Cellular makes the open offer of 20% to the Spice minority, Idea would have a
Promoters 57.7 net cash inflow of Rs35.1bn. The preferential issue of 464.73mn shares at Rs156.96
FII/NRI 36.2 would result into a cash-inflow of Rs72.9bn and the outflow would be Rs37.9bn,
2.6
(Rs21.7bn for acquiring Spice group’s stake at Rs77.3 per share, Rs10.7bn towards 20%
Institutions
open offer to Spice minority and Rs5.44bn towards non-compete fees). The 39.2% stake
Private Corp. 0.4
of TMI would be swapped for shares in Idea at a ratio of 49:100. Post merger, Idea’s
Public 3.1 equity would expand by 22.7% (3232.6mn shares) and TMI would have 18.5% stake in
Idea. (Refer table in page 2)

If TMI makes the 20% open offer to the Spice minority and swaps the acquired shares
along with its 39.2% stake in Spice, the deal would result in net cash inflow of Rs45.7bn
for Idea. In this case, Idea’s post merger equity would expand by 25.23% (3300.2mn
shares) and TMI would have 20.15% stake in Idea. In either of the above scenarios, the
deal turns out to be valuation neutral to Idea.

Remain bullish, maintain BUY

We view Idea-Spice merger to be very synergistic which would enhance Idea’s presence
Sumit Modi in the industry and would accelerate the subscriber additions going forward. We are
sumit.modi@emkayshare.com leaving our estimates unchanged for now, and would be reviewing them post detailed
+91 22 6612 1288 clarity on the whole transaction. Our analysis however indicates the deal to be valuation
neutral for Idea. We continue to remain bullish on Idea Cellular and maintain BUY rating
with a target price of Rs156. At CMP of Rs102, Idea trades at EV/EBIDTA of 9.7x and
7.3x for FY09E and FY10E respectively.

Emkay Research 25 June 2008 1

 ID E A C E L L U L AR Event update

Idea Cellular has announced that the open offer to the minority shareholders of Spice
Communications would be made jointly by Idea and TMI. However, the net cash inflow,
the effective valuation and the equity dilution would depend on the extent of participation
of Idea and TMI in the open offer. In the table below, we analyze the two extreme
scenarios where (1) Idea makes the open offer (2) TMI makes the open offer. In either of
the scenarios, the valuations of the merged entity post the preferential allotment remains
neutral to the current valuations of Idea Cellular.

If Idea makes Open offer If TMI makes open offer

Spice group's 40.8% stake at Rs77.3 21758.3 21758.3

20% Open offer to minority at Rs77.3 10665.9 -
Non compete fee 5440.0 5440.0
Cash outflow for Idea 37864.2 27198.3
TMI's stake swap at 49 :100 (valued at CMP of Rs102) 13517.1 20413.6
51381.3 47612.0
Spice’s net debt 9867 9867
Effective EV of Spice 61248.3 57479.0
Spice EBIDTA FY09E 3503.1 3503.1
EV/EBIDTA FY09E 17.5 16.4

Combined entity valuations If Idea makes Open offer If TMI makes open offer
Existing equity 2,635.4 2,635.4
New issue to TM (swap + Pref. issue) 597.3 664.9
Expanded equity post merger 3,232.6 3,300.2
Current share price of Idea 102.0 102.0
Mcap post merger 329,726.4 336,622.8
Idea's existing net debt 56,098.0 56,098.0
Spice's net debt 9,867.0 9,867.0
Net cash inflow from the deal 35,079.8 45,745.7
TMI's stake post merger (%) 18.5 20.1

EV of the combined entity 360,611.5 356,842.2

Combined EBIDTA for FY09 (consensus) 35,083.1 35,083.1
EV/EBIDTA of merged entity 10.3 10.2

Current EV of Idea (at CMP of Rs102) 324,904.8 324,904.8

EBIDTA FY09E (consensus) 31,580.0 31,580.0
EV/EBIDTA 10.3 10.3

Valuation diff of merged to existing -0.1% -1.1%

Source: Emkay research

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Emkay Research 25 June 2008 2