Vodafone move creates Indian leader
Rivals join forces to fend off upstart Jio New group valued at more than $23bn
The telecoms group has struck a deal to merge its Indian operations with local rival Idea Cellular to create the country’s largest mobile operator, valued at $23bn.—
Vodafone has struck a deal to merge its Indian operations with local rival Idea Cellular to create the country’s largest mobile-phone operator, valued at more than $23bn.
The two companies confirmed the deal yesterday, the second merger in the sector in as many months as telecoms operators rush to respond to an aggressive foray into the industry by Reliance Industries, the oil products group.
The consolidation is aimed at finding economies of scale after Reliance Jio ploughed $25bn into a pan-national 4G data service, announced tariffs well below prevailing rates and offered free services for six months. Last month, Bharti Airtel fired the starting gun on defensive dealmaking with plans to buy the Indian business of Norway-based Telenor.
After the Vodafone India and Idea merger, which is expected to close in 2018, the new group will be India’s largest operator, boasting almost 400m users and a 35 per cent share of the market by customer numbers.
The deal gives Vodafone India an implied enterprise value of Rs828bn ($12.6bn), and Idea an enterprise value of Rs722bn. Vodafone will own 45.1 per cent of the new business while the Aditya Birla Group, Idea’s parent company, will own 26 per cent after paying Rs39bn cash for a 4.9 per cent stake.
The deal is a landmark in Vodafone’s rocky experience in India, which began with the £6bn acquisition in 2007 of a majority stake in Hutchison Essar — later acquired outright — amid a wave of foreign investment in the sector.
The company was hit five years later by a $2.5bn retrospective tax charge that remains the subject of international arbitration. It was also surprised by the fierceness of price competition, leading to two writedowns totalling £6.6bn in 2010 and 2016.
The merger with Mumbai-listed Idea will offer Vodafone a means of securing a public listing for its Indian assets, for which it had long pondered an IPO. Vodafone India said the merger would generate synergies of Rs670bn after integration costs and other payments.
But Chris Lane, an analyst at Bernstein, warned that, while the scope for cost savings appeared large, this also came with risks for service quality. “There will certainly be disruption as they seek synergies, because they can only do so by firing people or removing network,” he said. He estimated that the merged company would lose 3-5 percentage points of market share over the next two or three years.
“I think both Jio and Bharti are licking their lips — this is a prime opportunity for them to take market share.”
The merged entity will also face regulations requiring it to have no more than 50 per cent of revenue and subscribers, and holdings below specified limits, in each of India’s 22 telecoms circles, or service areas. Analysts at CLSA estimate that the new company will fall foul of these rules in five circles, forcing them to shed clients and offload spectrum.
Kumar Mangalam Birla, chairman of the Aditya Birla Group, will remain as chairman of the new company.
Vodafone will appoint the chief financial officer and the two companies will together choose the chief executive. Lex page 12 Challenges loom page 15