Bharti Airtel, the telecom behemoth run by Sunil Bharti Mittal will be the biggest beneficiary of the Idea Cellular-Vodafone merger, according to analysts.
While the merger would create the largest telecom company in the country, with a market share of 42%, both Idea and Vodafone will have to let go some of its customers as regulations do not allow a telecom company to have more than 50% revenue market share in any circle.
Idea and Vodafone have revenue market share of over 50% in six out of 22 circles.
“Bharti Airtel can make the most of the revenue leakage from the potential merger,” writes Viju K George, analyst with New York-headquartered JP Morgan, in his report.
The other risks that might give Airtel some boost, according to George is that “in the near-to-medium term, the merger may cause some share loss.”
Also, eventually a single brand strategy will have to be worked out, especially if one brand (either Idea or Vodafone) seizes to exist. Both have complimenting strengths – Idea is strong in semi-urban and rural, and Vodafone dominates urban circles.
Throw in competition from Mukesh Ambani-led Reliance Jio, the telecom battle is far from getting over. “We expect triangular battle for market share to be a prolonged affair,” writes Abhishek Gupta of IDFC Securities, in his note. “We believe the challenges for the industry are unlikely to change due to sustained aggressive strategy of Reliance Jio to gain scale.”
Airtel’s gain was evident when Mittal supported the merger, even when there were speculations of Idea and Vodafone holding discussions. “It is a perfect match… Rural-urban, structured portfolio...makes for a good business case and I would support it,” he told a news publication during the World Economic Forum.
The integration, however, will at a cost. Layout of the 4G high-speed broadband network for different operators is not yet over. “We expect they (Idea and Vodafone) will lose 5% revenue market share in 2017-18 (as Reliance Jio starts charging) and a further 2% during the network integration period. This implies their combined subscriber share will fall from the current 40% to 34.6% by March 2018,” writes Chris Lane, analyst with another New York-headquartered global asset management firm Bernstein.
Expectations are that Reliance Jio will close the year with 105 million customers with an average revenue per user of Rs 270, according to Bernstein. That will also force the Idea-Vodafone alliance to “reprice” its voice and data plan around Rs 350 per month.
“The lack of extensive 4G network is a problem for both Vodafone and Idea. Even if we combine Vodafone and Idea’s scores in our survey they still rank third after Relaince Jio and Bharti, and also show significant weakness in B and C-circles,” Lane writes.
Once Reliance Jio starts charging its customers, the dynamics of the business will change. Jio has cornered a significant market share on the back of free services since it launched its operations in September.
According to a report by Motilal Oswal, both Vodafone and Idea will lose 2.5% to 3% basis point market share dilution over FY16-21E, due to weak competitive footing on individual basis.
Meanwhile, Airtel has also announced that it will buy Telenor’s local arm, its assets, spectrum and customers. Airtel and Reliance Jio might capitalise of the opportunities and grow their market share.