India’s second-largest telecommunication services provider Vodafone has confirmed it is in talks for an all-share merger with the third-largest operator Idea Cellular, in the first consolidation move in the Indian telecom industry reeling under the pressure of intense competition from Reliance Jio’s free service offers.
Vodafone, a unit of the UK-based Vodafone Group Plc, will subscribe to new shares issued in the Birla Group company Idea Cellular to effect the merger, the UK company said. Further, any merger would result in Vodafone Plc “deconsolidating” Vodafone India.
Indian regulations prevent one telecommunication company from buying over 20% equity stake in a rival telecom company.
Reliance Jio’s entry into the telecom space has forced the incumbent players to drastically cut tariffs – as much as by 66% – in order to retain their customer base, and has put the entire sector under tremendous pressure of choosing between protecting margins and user base. Reliance Jio recently extended its inaugural free voice and data plan till March 31 drawing complaints and criticisms from its biggest rivals Airtel and Vodafone, who assert that its anti-competitive practices and freebies are hurting the industry.
You may also like to watch:
— CNBC-TV18 News (@CNBCTV18News) January 30, 2017
Idea Cellular shares have surged on continued speculation of merger with Vodafone, raising hopes that the combined entity would be better placed to take on the competition from Reliance Jio. A possible Vodafone-Idea combine will surpass Bharti Airtel as the largest telecommunication company with a total subscriber base of 39 crore, far ahead of Reliance Jio’s 7.2 crore. Further, the combined entity would have 43% of the revenue market share and 40% of the active subscriber base, research firm CLSA said.
However, Vodafone also said there is no certainty on the transaction getting materialised or any terms and timing.
Observers have long believed that Indian telecommunications sector is bound to see consolidation as the weaker players find it increasingly difficult to cope up with the intensified competition and heavy pressure on margins.
High-profile consultant and former Bharti Airtel CEO Sanjay Kapoor said that any consolidation would be a welcome move for the industry. “The industry is no longer for the weak-hearted or mid-sized balance sheet companies,” Kapoor said to ET Now. Kapoor also said he expects Reliance Jio to be a real competitor in the market space.
Reliance Industries, India’s largest business conglomerate, launched its much-awaited telecommunication venture Reliance Jio Infocomm last year with a whopping Rs 1.5 trillion investments to start with, mainly in building high-speed internet infrastructure over the new 4G/LTE network across the entire country. It topped it up with an announcement of a further investment of Rs 30,000 crore in December.
Reliance Jio has said it has been adding 600,000 new users per day had already added 72.4 million customers as on December 31 on its network since launch in a hyper-competitive market.
Kapoor said the industry is moving towards a position where there will be only two or three money-making companies remaining in the market.
His views were echoed by Rajan S Mathews, Director General of industry body Cellular Operators’ Association of India (COAI), who said that Vodafone-Idea merger would be good news for customers. The merger would help both the companies to attract investments that will be key for future, he added.
You may also like to watch:
However, both Idea and Vodafone will have to consider the combined spectrum they hold in order to avoid breaching the regulatory limit. Indian rules also prevent any telecom operator from holding more than a certain amount of radio waves bandwidth in each of the country’s 22 service areas (circles).
Vodafone-Idea combine may breach those limits in certain service areas, resulting in shedding some of the spectrum. CLSA said the combined entity would have to sell about 1% of its spectrum to comply with the requirement. It added that the combined entity would account for over 25% of the allocated spectrum.
Mathews said the spectrum holding cap will be a key factor in the merger talks on the regulatory front.