Vodafone-Idea Merger Might Change The Telecom Game In India

As two of the biggest players in the market confirm their talks of merger, what does it mean for the market?

News that could potentially change the telecom game in India came through this week — Vodafone confirmed that it is in talks with Idea Cellular regarding a merger.

The news has been making rounds, riding a rumour cycle for a few days now.

A merger of British giant Vodafone and the vaunted Aditya Birla Group owned telecom arm, Idea — currently ranked #2 and #3 in India, respectively, can prove to be quite a game changer in the market.

For starters, with their networks combined, this new entity would have the potential to be the #1 telecom entity in the market — booting the longstanding top-brand, Airtel and the new, notorious kid on the block, Reliance Jio, to the second and the third spots in the market.

All of this is big news as the Indian telecom market — currently the second largest in the world is blood stained battle ground.
It has close to 1.1 billion phone connections, and growing! Mobile penetration has been growing at a phenomenal rate of more than 60% year-on-year for the last seven years, with the growth of the footprint increasing to over 70% year-on-year from 2012.
To scale those numbers out for you, India added nearly 7 million phone subscribers in one single month, from September 2016 to October 2016!

In a market like this, intense competition, perhaps to the point of being brutal, is expected. Voda and Idea have both been nipping at Airtel’s heels for many years now, but neither have ever really come close to Airtel’s numbers.

Now they can.

But there are other issues at play. A good speculative bet is that Vodafone and its British headquarters have grown frustrated with the Indian market, when it comes to regulatory and legal complications.

The long-pending capital gains tax issues, high spectrum pricing, and TRAI’s recent penalty recommendation over the provision of interconnect points to Jio are all perceived as unfavourable for business. Vodafone was reportedly charting out plans to raise $3 billion via an IPO, however, they have shelved that plan for now.

The ongoing merger talks could result in a reverse merger with the listed Idea, giving the combine more heft in the stock markets, said an industry person. Put the two together and you have a subscriber base of nearly 39 crores users, substantially higher than Airtel’s 27 crores and Jio’s present number of 7.2 crores.

It would also mean that they would have a revenue market share of nearly 40% compared with Airtel’s current 32%.

For the merger to go through, however, the combined new entity would need to dispose nearly Rs 18,000 crore of excess spectrum for the mega-consolidation deal to clear anti-trust hurdles

The new and notorious kid on the block, Jio, and its free services have already started to made dents in the other brands and their market standings. The #1 carrier, Bharti Airtel reported a 55% fall in its third-quarter net profit to INR 504 crores (USD 75 million), its worst in four years, while the #2 carrier, Vodafone India reported a 1.9% drop in service revenue in the December quarter. The third largest carrier, Idea, is slated to perform a lot worse, with some analysts estimating it to report its first ever net loss.

With these number ringing in their ears, the brands were expected to make a strategic move. After Reliance Jio came to the scene, the efforts Airtel, Vodafone and Idea have been making were expected to lead to some kind of a shakedown.

The deal, if it does follow through, would be a “merger effected through the issue of new shares in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India”.
What this in effect means is that if the two companies do merge, then there isn’t going to be an exchange of any hard cash on the part of either party, at all.
Something like this seems like an admission where both the companies seem to be running dry on their war chests.

The new shares that will be issued by Idea as it says in the statement in the press release, one can assume would be issued at prices based on a valuation of Vodafone’s network, customer base, and its assets. A good bet also is that they will probably be ring-fenced with a lock in period. A company, any company, would only accept something of this kind when it is running extremely low on options.

Also, what delivers the last stroke is the word “deconsolidating” in the statement.

In effect, would it mean that Vodafone, if the deal goes through, could wind up its operations in India?

The company’s CEO Vittorio Colao, however, denied that possibility when he stated “this is not an exit. This is about creating a stronger asset, create the №1 telco in the country…build the largest network in India and build the best management team through a combination of the two management teams. We are flexible and pragmatic”.

While this competition is great for the customers and has resulted in the fact that Indian pay less than a rupee a minute for a call, which is perhaps one of the lowest calling rates in the world at the moment, it has also led to the telecom companies running high and dry. The telecom companies are exhausted, out of ideas and virtually running on empty, or on corporate debt.

The companies need to up their network and technology structure every three to five years, to keep pace with rapid changes in technology, standards and increasing consumer base. To maintain these systems in the real world is quite a draining task when it comes to money.

To add to this is the average Indian customer, who has taken a jump from analog to smartphones, skipping the 90s and the early 2000s era of laptops and computers entirely. The innovative and completely out-of-box manner in which a smartphone is used by an average Indian is both a challenge and an opportunity to evolve a model that’s sustainable and brings in the right kind of revenues.

This merger, if it goes through, might change the dynamics in the Indian telecom market. Will it be able to restore a promising space for itself, or will it still have a rocky journey ahead of itself?

Originally published at Chip-Monks.