Battle lines for a new round of telecom wars have been redrawn with Vodafone and Idea Cellular announcing a merger to create the largest mobile operator in the country, with a net worth of ₹1.5 lakh crore.

The merged entity will not only be the largest telecom operator in terms of subscriber base, it will be the biggest in terms of revenue as well as spectrum holding.

It will have nearly 400 million customers, 35 per cent customer market share and 41 per cent revenue market share, trumping market leader Bharti Airtel. The two operators on their own were struggling to keep pace with the investments made by Airtel and new entrant Reliance Jio.

For consumers, the consolidation would mean more tariff wars as the industry settles down to five large players: Vodafone-Idea, Bharti Airtel, Reliance Jio, RCom-Aircel-Sistema and BSNL–MTNL.

Long-drawn affair The Vodafone-Idea deal will be done in two phases spread over five years. In the first phase, Vodafone will become a 50 per cent shareholder in the merged entity. Aditya Birla group will hold 21 per cent, while Malaysian investor in Idea Cellular, Axiata, will hold 10 per cent and the public, 19 per cent. The Birla group will then purchase a 4.9 per cent stake from Vodafone for ₹ 3,874 crore, at ₹110 a share. This will increase the Birla stake to 25.9 per cent, while Vodafone will hold 45.1 per cent.

In the second phase, the Birla group will have the right to acquire an additional 9.5 per cent stake from Vodafone, at ₹130 a share. If this option is exercised, both Vodafone and Birla group will own 35.5 per cent each.

If the Birla group does not buy the additional stake, Vodafone will sell the stake to a third party to bring its stake at par with that of the Birla group.

Awaiting approvals The first phase is expected to be completed by 2018 with all regulatory approvals in place and the second phase by 2022. In the interim, Vodafone will give up part of its voting rights to ensure equal representation on the board from day one. Kumar Mangalam Birla will be the Chairman of the merged entity. While the post of CEO and COO will be decided jointly, Vodafone will get to pick the CFO.

Idea will contribute all of its assets, including its standalone towers and its 11.15 per cent stake in Indus Towers. Vodafone India will include its standalone towers but exclude its 42 per cent stake in Indus Towers.

The agreed merger ratio implies an enterprise value for Vodafone India of ₹82,800 crore and an enterprise value for Idea’s mobile business of ₹72,200 crore. The merged entity will subsume Idea’s net debt of ₹52,700 crore as on December 31, 2016, and Vodafone’s debt of ₹55,200 crore.

According to the companies, the merger will help them save $2.1 billion through operational synergies and efficient staffing.

The transaction faces many regulatory challenges and will take almost a year to conclude. The merged operator will breach the spectrum holding cap in five circles in the 900 MHz band and two in the 2500 MHz band, and likely breach the revenue market share cap of 50 per cent in 6 circles.

RJio effect RJio has launched an audacious plan to eat into incumbent operators’ market share through cheaper data tariffs and free voice calls for life. This has forced rivals to dramatically slash tariffs. Harsh Jagnani, VP - Sector Head, ICRA Ltd, said, “Pressure created by RJio’s launch and the subsequent pricing competition has pushed the telecom industry to consolidation. The merged telco should also benefit from operational synergies, which will allow it to curtail some expenses.”

Mayuresh Joshi, Fund Manager, Angel Broking, said: With data pricing still competitive and operators fighting to regain subscriber and revenue market share, pricing pressures will continue.”