Vodafone, Idea in merger talks

In a move aimed at thwarting the threat from Reliance Jio and Bharti Airtel, two of India’s biggest telecom operators, Vodafone and Idea Cellular, have initiated talks to merge their operations.

If the merger goes through, it will result in the creation of the country’s biggest telecom company, both in terms of revenue and subscriber base.

At present, Bharti Airtel is the leader with a total subscriber base of 265 million. Vodafone India ranks second with 204 million users and Idea Cellular is third with 190 million subscribers.

In the event of a merger, the new entity would have a subscriber base of 395.21 million.

“Any merger would be effected through the issue of new shares in Idea Cellular to Vodafone and would result in Vodafone de-consolidating Vodafone India.

“There is no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction,” Vodafone Plc said in a statement.

There are, however, regulatory hurdles that could come in the way.

There are at least six markets in which the Idea-Vodafone combination would exceed the currently allowed 50 per cent revenue market share.

Regulatory bumps M&A rules also prohibit any entity from having more than 50 per cent of spectrum assigned in any single band.

Analyses by various research firms suggest that the merged entity may have to surrender 12.8 MHz of 900 MHz spectrum, worth $1 billion.

The merged entity could also breach the subscriber market share cap of 50 per cent in two circles.

There is also the possibility that the Idea-Vodafone combine may be asked to pay a one-time fee for spectrum liberalisation. This fee, amounting to about ₹5,500 crore, is currently under litigation. The impact of the ongoing tax case against Vodafone is also not clear. Regulators may insist on the litigation being cleared before allowing the merger.

Big benefits But if the merger still goes through then there are significant benefits for both entities, especially in countering the threat from Reliance Jio.

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 the Aditya Birla Group and the Vodafone Group,” said GV Giri, Telecom Analyst, IIFL.

Both telcos have large national networks with substantial investments in coverage. This duplication of coverage can be converted to capacity creating savings in capital expenditure.

Also, the spectrum that the companies have can be pooled to double capacity overnight. Idea has 3G spectrum in 13 circles and 4G spectrum in 11 circles. Vodafone has 3G spectrum in 16 circles and 4G spectrum in nine circles.

The combined entity will have 3G in 21 circles and 4G in 17 circles, significantly augmenting the data footprint.

This will reduce future spectrum needs significantly.

A Bank of America Merrill Lynch analysis showed that the merged company would realise an increase of 9 per cent to 21 per cent in EBITDA as a result of the operational synergies arising from the merger.

On Monday, Idea Cellular shares soared during the day and closed up 25.90 per cent at ₹97.95 on a weak BSE, which ended down 0.12 per cent.

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