Merger may lead to $1 b in savings for Idea, Vodafone

The proposed merger between Idea Cellular and Vodafone could lead to huge savings of nearly a billion dollars and massive gains in terms of revenue market share compared to the current businesses of the two operators.

If the merger happens, it will create a company with No.1 position in market share in India wireless sector. The improved market position plus the reduced competition will mean stronger branding, better realisation and overall value creation.

“Our estimate is that the annual savings can be well over $1 billion, and hence the merger will be attractive to both Aditya Birla Group and the Vodafone Group,” said GV Giri, Telecom Analyst, IIFL. The savings will be in the form of shared resources and cutting down on overlap.

For example, both companies have more than 1.5 million outlets serviced by independent distribution networks. Both telcos have large national networks with substantial investments in coverage. This duplication of coverage can instead be converted to capacity creating savings in capital expenditure. Also, the spectrum that the companies have can be pooled together to double capacity overnight. Similarly, staffing costs can be cut substantially.

According to Philips Capital, the merger will make the combined entity the No.1 player with a revenue market share of 42 per cent significantly higher than Bharti Airtel. “Apart from the market share gains, there could be significant operational synergies that will improve the cash flow profile and capital efficiency of combined entity Idea has a revenue market share (RMS) of 19 per cent and Vodafone’s RMS is 23 per cent.”

Idea 3G spectrum in 13 circles and 4G spectrum in 11 circles. Vodafone has 3G spectrum in 16 circles and 4G spectrum in 9 circles.

The combined entity will have 3G in 21 circles and 4G in 17 circles significantly augmenting the data footprint for the combined entity. This will reduce the future spectrum needs significantly.

A merged entity would have a stronger footprint in 900 MHz, 1800 MHz and 2100 MHz, which would reduce its need to be aggressive in the upcoming spectrum auctions and hence reduce future capex and improve cash flow.

“Apart from spectrum synergies there will significant operational synergies with reduction in network opex, distribution and marketing expenses.

“With reduced spectrum needs, the capital expenditure will also reduce thereby improving the cash flow profile.

“The combined entity could generate EBIDTA in the range of ₹28,000-30,000 crore similar to Bharti Airtel’s India business of ₹29,000 crore generated in FY16,” said Philips Capital.

The two operators will also gain due to their respective geographical strengths.

According to Goldman Sachs, while both companies are pan-India telecom operators, Vodafone has more of an urban focus with strong market share positions in metro and Category A service areas whereas Idea has a stronger presence in Category B.

Bank of America Merryl Lynch analysis showed that the merged company will realise 9-21 per cent increase in EBITDA as a result of the operational synergies arising from the merger.

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