Vodafone India and Idea Cellular - the country’s second and third-largest mobile operators — on Monday said they were in talks for a potential merger.
Vodafone India and Idea Cellular — the country’s second and third-largest mobile operators — on Monday said they were in talks for a potential merger. Should it fructify, the merger would create the country’s largest player with a revenue market share of 43% leaving Bharti Airtel in the second slot with a share of 33%.
The discussions signal an acceleration of the consolidation process in the intensely competitive telecom market which could put an end to the debilitating tariff war and boost the industry’s profitability.
Speculation on a merger has been in the air for several months now especially after Idea Cellular, which has been weighed down by debt and bruised in the tariff war, initiated a restructuring of group companies to be able to channel more resources into the telecom business.
With a big chunk of 3G and 4G spectrum, the merged entity will be well positioned to take on both Bharti Airtel and the new operator, Reliance Jio Infocomm. Its total revenue at over Rs 80,000 crore will be smaller than Bharti Airtel’s consolidated revenue of Rs 96,532 crore in FY16 but bigger than revenues earned by Bharti’s India operations of Rs 70,843 crore.
Analysts point out the synergies come in the form of a stronger urban footprint for Vodafone and a bigger presence for Idea is the hinterland. Circle-wise the split will be 50:50 with the combined entity commanding the highest RMS in 11 circles and coming second to Bharti in the other eleven. The merged entity’s Ebitda is also expected to improve by 25-30% on the back of lower costs.
There could be some challenges on the regulatory front. The merger and acquisition rules mandate that no operator can own more than 25% of the total spectrum allocated in a circle and 50% in a given band. Further, the RMS of an operator should not be more than 50% of the overall revenue in that market. Vodafone and Idea together will breach spectrum caps in five circles — Kerala, Gujarat, Haryana, Maharashtra, and UP (west) in 900 Mhz band and in Gujarat and Maharashtra also in 2500 Mhz. This means the merged entity will have to surrender the excess spectrum in these circles. On the RMS front, the 50% cap would be breached in Haryana, Kerala, Maharashtra, and UP (west). However, once Reliance Jio Infocomm starts charging its subscribers and gains revenue market share, the problem would be resolved.
Analysts believe that given the size of the merger given that this is the first time it would trigger the M&A clauses built in to check monopolistic practices, it was possible the Competition Commission of India would take a lenient view and relax the guidelines if it was satisfied there would be no abuse of dominance by the merged entity.
Rahul Khullar, former Telecom Regulatory Authority of India chairman told FE that a broader view should be taken by the CCI since surrendering of spectrum does not make sense. “A company acquires another one for spectrum. What’s the point of surrendering spectrum? It would make better sense if the CCI satisfies itself that there would not be any abuse of dominance by the merged entity and then allow the merger. With four operators even post-merger, there isn’t any realistic chance of any operator turning monopolistic,” Khullar said.
He suggested the government could put curbs on the merged entity for acquiring additional spectrum in the circles where it is above the prescribed limit at fresh auctions.
Moreover, Trai could keep vigil to ensure the entity was not indulging in anti-competitive practices. “After all, having extra spectrum will lead to better quality of services, which is required today,” Khullar added.
The merged entity will be in very advantageous position where spectrum banks are concerned. For instance, in the 900 Mhz, the two can create a 10 Mhz block in 7 of the 22 circles without harmonisation. These would be Delhi, Gujarat, Haryana, Kerala, Maharashtra, Mumbai, and UP (west).
Likewise in 2100 Mhz, they would be able to create a contiguous block of 10 Mhz or more in Gujarat, Kerala, Kolkata, Maharashtra, and Mumbai without harmonisation. In circles like Rajasthan, Tamil Nadu, and UP (east), they can create a block of 15 Mhz post harmonisation.
In 2500 Mhz, the duo would be able to create a 20 Mhz block in 13 of the 22 circles.
Vodafone Plc, the parent of the Indian firm said in a statement that it is in discussions with the AV Birla group about all share merger of Vodafone India (excluding Vodafone’s 42% take in Indus Towers) and Idea. “Any merger would be effected through the issue of new shares in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India,” it said. On its part, Idea cellular said that the fundamental premise of the preliminary discussion is based on equal rights between the two firms. The two also clarified that there is no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction.