The Aditya Birla group has managed to eke out equal management rights in the merger of Idea Cellular Ltd and Vodafone India Ltd, despite having a much lower shareholding. The fallout: Vodafone Group Plc will gradually bring down its stake in the combined entity from 50% to start with to possibly as low as 26%.

From having sunk billions of dollars into the Indian market, Vodafone now suddenly looks far less ambitious with its India plans. Besides, without its deep pockets, it will be interesting to see how the combined entity fights against the huge resources being deployed by Bharti Airtel Ltd and Reliance Jio Infocomm Ltd.

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Vodafone’s investors have already been recommending an exit from India. Although the company appears to have chosen the middle path—by retaining a stake (of between 26 and 35%) and raising cash by selling its remaining exposure—investors in the merged company might well view this shrinking interest as a sign of lesser interest in the Indian market’s prospects.

To start with, Vodafone will sell a 4.9% stake in the merged entity to the Birla group at around Rs110 per share, for a total consideration of Rs3,874 crore. This is about 51% higher than Idea’s valuation before the two companies announced they were in merger talks. In other words, the Birlas appear to be firm believers in the prospects of the merged entity. This transaction will take the Birla group’s stake to 26% and bring Vodafone’s stake in the merged entity down to 45.1%.

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The merger agreement also gives it the Birla group a right to acquire more shares from Vodafone “under an agreed mechanism with a view to equalising the shareholdings over time". If the Birlas don’t exercise this right within four years of the completion of the deal, and their shareholding stays at 26%, then Vodafone has to sell its shares to outside shareholders and bring its stake down to 26%. For this, it has a five-year timeframe after the Birla group’s right to buy its shares elapses. In this scenario, Vodafone will be effectively cutting its interest in the Indian market by more than half.

The deal with Idea excludes its 42% stake in Indus Towers Ltd, and the company’s press release suggests a partial or a full disposal of this stake is also on the cards. If the Birlas don’t exercise this right within four years of the completion of the deal, and their shareholding stays at 26%, then Vodafone has to sell its shares to outside shareholders and bring its stake down to 26%. For this, it has a five-year timeframe after the Birla group’s right to buy its shares elapses.

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Although, of course, it doesn’t preclude it from selling its shares to other investors. The silver lining in all this is that the Birla group has settled on a valuation of Rs130 per share for the possible future transactions in the first three years after the completion of the transaction. If it goes ahead and buys shares from Vodafone at these prices, it should provide investors some assurance that at least one of the partners in the merger is increasing its bet on the Indian market substantially.

It’s worthwhile noting here that in the restructuring of Aditya Birla group companies last year, the promoter group effectively cut its stake in the telecom business from about 23.6% to around 20%. It remains to be seen to what extent it actually invests and increases its exposure to Indian telecom.

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