One operator, two brands: Vodafone Idea merger signals new dynamics in telecom sector

The newly merged telecom entity Vodafone Idea Ltd will operate under both Idea and Vodafone brands in a bid to keep its existing customer loyalty intact. The operator has a subscriber base of over 408 million, ending Bharti Airtel’s dominance in the sector.

The operator has also constituted a new board comprising 12 Directors (including six independent members) with Kumar Mangalam Birla as the Chairman. Balesh Sharma has been named the CEO.

The merged entity has pan India Revenue Market Share (AGR) of 32.2 per cent. It has a large spectrum portfolio of ~1850 MHz and an adequate number of broadband carriers and distribution reach with over 1.7 million retailers and around 15,000 branded stores to service customers.

The merger is expected to generate ₹14,000 crore annual synergy, including opex synergies of ₹8,400 crore, equivalent to a net present value of approximately ₹70,000 crore.

But there are huge challenges ahead for the company. As on June 30, 2018, net debt was ₹1,09,200 crore. This is going to be a problem as the operator will have to pump in more money for rolling out new 4G infrastructure.

There is also the possibility of the government holding spectrum auctions for 5G services next year. A highly leveraged balance sheet can affect the operators ability to invest further although Kumar Mangalam Birla in a recent interview told BusinessLine that funding will not be an issue.

Declining revenues

The other major problem is the impact of Reliance Jio’s aggressive roll out. Both Idea and Vodafone have reported declining revenues. Revenue for Idea has declined 29 per cent year-on-year, with declining revenue market share. Vodafone’s adjusted gross revenue has also declined 25 per cent y-o-y.

Sanjay Kapoor, former CEO of Bharti Airtel, had recently told BusinessLine: “ It is good to reach the numero uno position but we will have to see if they can sustain that position. The challenge is accentuated by the fact that Vodafone Idea is lagging on 4G investments.”

The other big worry is that even after the merger their balance-sheets don’t look healthy enough to be able to bring in additional investments. “Contrary to everyone’s belief, the pricing pressure doesn’t seem to be dying down any time soon,” added Kapoor.

Job losses

The immediate worry though would be to manage the employee base of the combined entity. Mayur Sarswat – Head of Digital, IT and Telecom Vertical, TeamLease Services Ltd, said: “The merged entity has initiated a golden handshake to employees who are not finding a place in the new entity. Elimination of duplication and productivity are the reasons. The merged entity will also have focus on hand-holding of employees who may suffer emotionally due to the change in the operating environment and business procedures.”

Telecom consolidation

The merge,r in effect, signals the end of the ongoing consolidation in the sector. Most small players including Telenor, Tata Tele, RCom and MTS have exited the market. Prashant Singhal, Global Telecoms & Technology, Media and Telecommunications (TMT) Emerging Markets Leader, EY, said, “With consolidation shaping in to 3+1 player market structure, stability is likely to set within 6-12 months. Network quality and integrated content will be primary differentiator for telcos, with current tariffs being low. We will see emergence of industry mashups between unlikely partners – Technology, Media and Telecommunications and other platform players.”