Vodafone-Idea merger and how it will change the Indian telecom industry | business-news | Hindustan Times
Today in New Delhi, India
Jun 28, 2017-Wednesday
-°C
New Delhi
  • Humidity
    -
  • Wind
    -

Vodafone-Idea merger and how it will change the Indian telecom industry

Vodafone fights back, initiates merger talks with Idea Cellular, in battle against Reliance Jio. The merger would leave three large telecom operators in India, making Vodafone-Idea the largest operator.

business Updated: Jan 31, 2017 17:00 IST
Sunny Sen
Vodafone Idea merger
A man speaks on his mobile phone as he sits in front of a shop displaying the Idea Cellular Ltd's logo on its shutter in Mumbai(REUTERS)

In November, when British telecom major Vodafone Plc slashed the value of its local business by five billion euros (Rs 36,449 crore), for once it seemed that the India’s second largest telecom operator is hanging up its boots in the battle of might, triggered by Mukesh Ambani-led Reliance Jio.

All that changed on Monday, when the Vodafone announced talks of a merger with Idea Cellular, the telecom operator run billionaire industrialist Kumar Mangalam Birla. If the merger goes through, it will make the combined entity the largest telecom company of the country.

Is that enough to protect Vodafone against the $25 billion investment by Ambani into Reliance Jio? Jio with its free internet services has already acquired over 70 million subscribers, making it one of the fastest growing companies in the world.

In November, Vittorio Colao CEO of Vodafone Plc said, “Any company that gives stuff away is not a company, it is a charity.”

Consolidation was inevitable, it seems. In 2008, when six new licences were given the number of telecom operators grew to 12. After the 2G scam surfaced a couple of years later, some pulled out of the telecom market, others were reduced to marginal players, operating in a few cities.

“This could unlock $9 billion in potential synergies and offer an elegant route for Vodafone to deconsolidating India, thereby helping focus attention back onto a rebounding European equity story,” said New York-headquartered financial services firm JP Morgan.

The merger would leave three big telecom players – Airtel, Vodafone-Idea and Reliance Jio, apart from state-owned telco BSNL. The merged entity will hold revenue marketshare of 42%, overtaking Airtel, which has 31.4%.

Reliance Communication, run by Ambani’s younger brother Anil Ambani is in talks to acquire Aircel to sustain business. It has already acquired MTS, which was earlier run by a Russian conglomerate.

The consolidation will leave enough marketshare for each player to make significant investments in the Indian entity. Vodafone and Idea will have more spectrum than any other telecom operator, and can focus its investments in offering cheaper high-value products to its customers.

“The combined entity will have best-in-class coverage as well as capacity spectrum,” Singapore-based PhillipCapital wrote in its report. “The combined entity will have to give up some spectrum in 900MHz and 2500MHz; the spectrum in 900MHz in 17 out of 22 circles contributing more than 90% of industry revenues will be significant competitive advantage… The spectrum requirements for the combined entity will reduce significant over the years to come.”

According to Indian regulations, a telecom operator cannot have more than 50% revenue share in any circle. There is also a cap of spectrum holding.

“(The merged entity will) hitting revenue or subscriber share and spectrum holding caps in few circles (revenue cap hit in six circles, subscriber cap hit in five circles, and spectrum cap in five circles (900MHz and 2 circles in 2500MHz),” New York-headquartered investment banking firm Jefferies said in a report.

Had it not been for Reliance Jio’s entry, the merger would have been delayed. Analysts wrote that “Jio’s disruptive free distribution of SIM cards” was a catalyst.

Another American financial services firm Bernstein wrote, “The merger would be achieved through an issuance of Idea shares to Vodafone, with Vodafone technically ceding control of its Indian operations and hence deconsolidating Vodafone India.”

However, Idea in its filing to the Bombay Stock Exchange said that the premise of the merger talks is based on “equal rights” in the merged entity.

The merger doesn’t indicate that the price war between the large telecom operators will end. Maybe it is just the beginning of a bitter battle.

“We see a three player mobile market more sustainable in the long-term, as it can also accommodate Jio’s market share aspirations while ensuring profitability for all majors. While voice or data pricing and ARPUs will continue to decline for the next few quarters, we see room for ARPUs to go up, once Jio gets a decent revenue scale (double digit RMS) and achieves EBITDA positive,” said a report by JM Financial.