Voda­fone move cre­ates In­dian leader

Ri­vals join forces to fend off up­start Jio New group val­ued at more than $23bn

Financial Times Middle East - - Front Page - ALIYA RAM — NEW DELHI SI­MON MUNDY — PUNE

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

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