Morgna Stanley on IDEA, SPICE Merger

Morgan Stanley on IDEA-SPICE Merger

Quick Comment: Recent articles in the press (Economic Times) and on news channels (CNBC TV18) have suggested that Idea Cellular will merge with Spice Communications Ltd.

Our key takeaways, assuming that these as yet unconfirmed reports turn out to be correct: For the sector as a whole, we believe that consolidation is good news; in this case, it would reduce the number of players by one. The merged entity would have 17.4mn subscribers and a market share of 10.2%. Such a merger would enhance Idea’s coverage from 11 circles currently to 13 circles and increase effective population coverage from 59% to 66%. However, this entity would not displace any of the top four players in the Indian wireless market.

We believe that EV/EBITDA multiple is a superior valuation tool, but we use EV/sub for our estimates, since Spice is not a listed entity. Based on our estimates, Idea trades at an EV/Sub of US$583, which is close to the industry average. We believe the deal would be value-accretive for Idea if done at under a 15% discount to this EV/Sub, i.e., at approximately US$500. This would imply an EV of US$1.4bn for Spice. Spice had recently filed its draft documents with the Securities and Exchange Board of India (SEBI) for an Initial Public Offering (IPO). This leads us to believe that the merger may not happen unless the Modi Group (promoters) withdraws the document.