The merger of Idea and Vodafone, announced earlier this week that would create a telecom behemoth a year from now, favours AVBirla group a tad bit more than it does Vodafone, a report by proxy advisor IiAS has said.

According to the terms of the merger agreement, Idea Cellular gets equal voting rights despite being relatively smaller, and an option to buy out equity from Vodafone at a pre-determined price. The AVBirla group also gets Chairmanship of the Board. "Vodafone plc’s shareholders should be concerned that they drew the short straw," IiAS said.

"The Idea-Vodafone merger will create the largest telecom company in India, at an equity valuation pegged at Rs 94,600 crore. It gets the Aditya Birla (AVBirla) group to pole position and saves Vodafone plc from having to consolidate the India business on its balance sheet," the report said.

IiAS believes Vodafone has given away more in this deal. Vodafone is larger than Idea Cellular, and while one may argue that the gap is narrowing, Vodafone should have had a stronger position in this transaction. In allowing an equal relationship with Idea, Vodafone should have commanded a premium and better quality of control. But, the deal contours considerably favour Idea Cellular.

Voting rights

Vodafone has been generous in other ways too, the report continued. It has allowed the AVBirla group a three-year period (the ‘standstill’ period) to equalise the equity stake, yet allowed it equal voting rights before stake equalisation.

During the ‘standstill period’, until equalisation is achieved, the voting rights of the additional shares held by Vodafone will be restricted and votes will be exercised jointly under the terms of the shareholders’ agreement. While this may be conducive to a harmonious merger, it has short-changed Vodafone plc’s shareholders of their voting rights.

"Vodafone has also granted a call option on 9.5 per cent of its equity without any premium. The AVBirla group can, within the next three years, acquire from Vodafone up to 9.5 per cent of the combined entity’s shares at a pre-determined value of Rs.130. In case the AVBirla group does not acquire this equity, Vodafone will be compelled to sell down its equity stake till it equalises with that of the AVBirla’s. Therefore, if the price of Rs.130 is not attractive, the AVBirla group will not exercise its option to purchase equity and Vodafone will have lost the opportunity to encash its holdings. This deal component not only allows the AVBirla group’s the power to decide if the valuation is right, but also pivots the equalisation to the AVBirla group’s holding."

An earlier report by BusinessLine also drew similar conclusions, that the Vodafone-Idea marriage will be net-positive for the minority shareholders of the publicly listed Idea.