Citigroup - IDEA SPICE Merger

Citigroup in their report on IDEA Spice Merger answer some interesting questions

How likely is it? — Recent media reports suggest there is more to Idea-Spice talks
than pure speculation. However, hurdles remain to the timing (Spice’s listing
plans, Idea’s share lock-ins) as well as the modalities (with reported intentions of
both to buy the other one out to fulfil their national ambitions).


What is the rationale? — The footprint, with Spice’s presence in Punjab and
Karnataka, offers a good fit for Idea. While Spice’s weak presence in Karnataka is a
dampener, there is an opportunity to turn it around. Depending on the structure,
TM stands to gain from a stake (albeit smaller) in a larger Indian wireless play.

What will be the relative valuations? — The relative merger/takeout valuations
would reflect our estimates for Spice’s equity value at US$800-1,000m. In a pure
merger scenario, that would translate to Spice promoters owning 9-11% equity in
the potential combined entity (at Idea’s present market cap).


Who else benefits? — Though small in itself, any M&A event would bode well for
sector fundamentals and valuations. Besides, it might also prompt a rethink among
the remaining aspirants, i.e. Maxis-Aircel and RCOM (given the uncertainty on
GSM spectrum). The larger incumbents would also benefit indirectly. The valuation
range implies RM0.40-0.50 per Telekom Malaysia share for TM's 49% stake in
Spice. This is versus RM0.40/share in our current SOTP based target price for TM.

Remain Overweight on Indian wireless — Potential M&A adds to the long list of
positives – accelerated supply-driven rollout, attractive paybacks (on per min
basis), infrastructure sharing and rational competition. Bharti remains our top pick.