A Good Call?

The proposed Vodafone-Idea merger, although beneficial for the sector, may not augur well for consumers.

The proposed Vodafone-Idea merger, although beneficial for the sector, may not augur well for consumers

The telecom sector is abuzz again. Vodafone India, the second-largest telecom player, confirmed that it is in talks with Aditya Birla Group-owned Idea Cellular for a possible merger. If the deal goes through, it will be the largest in India’s telecom history. Vodafone says “any merger would be effected through the issue of new shares in Idea to Vodafone” and would result in Vodafone deconsolidating Vodafone India. Idea says that the fundamental premise of the preliminary discussion is based on equal rights between the two players in the combined entity. The merged entity would become the largest telco in the country in terms of subscriber base (395.2 million), surpassing the current market leader Bharti Airtel (265.8 million subscribers) by a huge margin. Its spectrum market share (27 per cent) and revenue market share (42 per cent), too, will be larger than others’.

The telecom sector has been on a consolidation spree in the recent past with Airtel acquiring Videocon Telecom’s airwaves in six circles, and Reliance Communications’ impending merger with Aircel and MTS. The Vodafone India and Idea merger has been on the cards; the disruptive entry of Jio has merely accelerated the M&A process.

The potential merger would result in cost saving for the combined entity, and synergies – Vodafone is a strong player in the urban market, whereas Idea is stronger in the hinterlands. With the voice market going down, the focus is shifting towards data. The merged entity will be a strong player in the data market, too, with 3G spectrum across India and highest 4G spectrum in the 1800 MHZ band. “Idea and Vodafone would likely have significant tower overlap, and a combined entity could potentially redeploy equipment from existing duplicate sites to new sites,” says a Goldman Sachs report.

There are, however, some regulatory hurdles. The combined entity would have more than 50 per cent revenue market share in six circles, which is considered anti-competitive under existing regulations. The market share has to be lowered to 50 per cent within one year which would result in $848 million revenue loss. The combined entity would also breach the 25 per cent spectrum market share in four circles. This spectrum, worth $871 million, has to be lowered.

Over the past few years, rising spectrum costs, and sliding profit margins have forced telcos to either sell their spectrum or consider merger or shut shop. The Indian telecom market is largely mirroring the global trend. Most mature markets have licensed just three to five telecom operators. Experts say that for the telecom sector to work efficiently there ought to be only three to four operators. In India, there are 10 telecom operators at the moment.

While the merger will be good for the industry, consumers are unlikely to gain from it. With fewer players, consumers will have limited options to choose from. Over time, these operators are likely to operate in tandem to decide tariffs. In the past, telecom companies have followed each others’ footsteps in raising tariffs. Even Reliance Jio, which is offering free data and voice, will have to, at some point, look for return on investments. As will others – Airtel, Vodafone, and Idea – who have invested heavily in acquiring pricey spectrum and upgrading their networks. ~

THE MERGED ENTITY WOULD BECOME THE LARGEST TELCO IN THE COUNTRY IN TERMS OF SUBSCRIBER BASE