BofA ML:: Idea Cellular - M&A speculation revives

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Idea Cellular Ltd.
M&A speculation revives
􀂄 CEO resignation renews expectations of ownership change
Mr. Sanjeev Aga, Managing Director of Idea Cellular will be leaving office from
April 2011 but will continue as a director on the board. Mr. Himanshu Kapania is
the new MD-designate and is currently Director - Operations in charge of all the
company’s circles in South and West India. The stepping down of Mr Aga ahead
of his scheduled retirement, and at the cusp of regulatory and competitive
changes in the industry has renewed market expectations about possible
ownership changes at Idea, as previously widely speculated in the media. Idea is
tightly held; ~47% stake is with the Aditya Birla group, ~19% is with Axiata, and
Providence owns ~10%.

Upside for minorities may not be strong; Underperform
Our fundamental Underperform rating on Idea stays unchanged despite M&A
speculation. A potential sale of a controlling stake in Idea could fetch up to 35%
valuation premium from current levels, on EV/EBITDA, using the Hutch-Vodafone
deal as a benchmark. This implies a potential deal price of up to Rs115/sh for
Idea. However, we think returns for minority shareholders will likely be unexciting
after factoring non-compete fee at 25% of deal price (SEBI maximum) & assuming
that those shares that may not get accepted in a potential open offer trade at our
PO of Rs65/share.

Many potential suitors
We believe Idea is likely to have many potential suitors for 3 key reasons:
1) strong brand presence reflected in its pan-India wireless revenue market share
of ~12% vs subscriber market share of ~11%;
2) access to 900MHz frequency
(assuming no re-farming); nearly 50% of Idea’s spectrum is in the 900MHz band;
3) comfort with accounting & organizational practices.

Earlier media reports hinted
at Etisalat and Reliance Industries (RIL) as potential buyers. For the Aditya Birla
group, any desire to potentially monetize Idea may reflect 1) long-term competitive
intensity in telecom factoring RIL’s launch, & 2) valuation upside and RoE profile
vs peers & group Cos.


Price objective basis & risk
Idea Cellular (IDEAF)
Our PO of Rs65/sh for Idea is based on DCF. Our PO implies a valuation of 7.5-
8x FY12E i.e. 35-40% premium vs GEM wireless majors to allow for stronger
long-term growth potential if 3G ramps up. Sooner than expected industry
consolidation, and stronger-than-anticipated Indus profitability could present
upside to our PO. Significantly higher competitive intensity in the industry and
dramatic regulatory changes pose downside risks.