The National Company Law Tribunal has approved the proposed merger between Idea Cellular and Vodafone – a move that brings both the companies closer to culminating the deal. Both the groups can go ahead for the final approval for the merger from the Department of Telecom after Vodafone’s appeal for the scheme also gets NCLT nod.
“We wish to inform you that the Hon’ble National Company Law Tribunal, bench at Ahmedabad, vide its order dated January 11, 2018 has sanctioned the composite scheme of amalgamation and arrangement among Vodafone Mobile Services Limited and Vodafone India Limited and Idea Cellular Limited…,” PTI quoted Idea Cellular as saying in a regulatory note.
Last February, India’s second-largest telecommunication services provider Vodafone 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.
Meanwhile, Telecom Commission approved TRAI’s recommendation on relaxing spectrum-holding caps to 35% from 25%, which is critical for Idea-Vodafone merger to go through. The decision, if it gets Cabinet nod, will provide a major relief to the telecom companies, as, otherwise, they would have breached the spectrum cap in certain locations under the existing rules.
Experts believe that the combined entity would be better placed to take on the competition from Reliance Jio.
- Combined strength: 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. The two operators complement each other, with Vodafone having strong presence in urban areas and Idea being an established player in the hinterland.
- Merger costs: However, any further upside to Idea shares might now depend upon further details of financial benefits to the post-merger entity. While the new capital that Vodafone brings in may be used to pare the substantial debt that Idea has on its books, there are costs to be borne by the combined unit. The merged entity would have to return scarce radio spectrum in five circles, thanks to TRAI’s spectrum holding limits, and will have to fork out Rs 2,000-3,000 crore by way of spectrum liberalisation charges.
- Competitive intensity to continue: Even after that, risks to Idea forecasts remain given Jio’s free offers and demonetisation, CLSA said. CLSA has put Idea’s rating and target price under review under further clarity emerges. BSE and NSE member and veteran trader-investor Dipan Mehta said that the merger is based on a disruptive event, and that the impact on existing players to remain whether they merge or not. The recent surge in Idea’s stocks may be used to book profits, he said. Moreover, there are concerns that with the competitors taking active steps to build scale, Reliance Jio may further intensify its offerings, putting even more pressure on the incumbents.
- Spend now, earn later?: While the costs of merger — regulatory compliance, spectrum shedding, subscriber market share rationalisation — will be immediate, the potential benefits to the merged entity’s earnings will materialise only later. Earnings propositions for Vodafone-Idea combine over the next two years will still be unclear, KR Choksey Securities’ MD and CEO Deven Choksey said.