Chal­lenges loom for Voda­fone af­ter In­dia deal

Tie-up with Idea will need to spend heav­ily to keep pace with ri­val Jio’s in­vest­ment in mo­bile broad­band net­work

Financial Times Middle East - - Companies - SI­MON MUNDY, NIC FILDES AND ALIYA RAM

An hour af­ter an­nounc­ing the biggest merger in In­dian cor­po­rate his­tory, Voda­fone chief ex­ec­u­tive Vit­to­rio Co­lao sat in a Mum­bai ho­tel ball­room, in­sis­tently deny­ing that his hand had been forced by the global tele­com sec­tor’s most ag­gres­sive new ar­rival.

The pro­posed merger of UK-listed Voda­fone’s In­dian sub­sidiary with its lo­cal ri­val Idea Cel­lu­lar would cre­ate the coun­try’s largest mo­bile op­er­a­tor, with an ag­gre­gate sub­scriber base of 396 mas of De­cem­ber, and a com­bined en­ter­prise value of $23.2bn, ac­cord­ing to the merger terms re­vealed yes­ter­day.

The deal fol­lows an am­bi­tious as­sault on the sec­tor by oil re­fin­ing gi­ant Re­liance In­dus­tries, whose Jio sub­sidiary is in­vest­ing $29bn to pro­vide what it says will be mo­bile data ser­vices of un­ri­valled qual­ity and value.

Mr Co­lao ad­mon­ished In­dian re­porters, how­ever, for per­ceiv­ing a con­nec­tion.He said :“Our de­ci­sion to merge has noth­ing to do with Jio.”

Few an­a­lysts are will­ing to take him at his word. Last April, Voda­fone was sound­ing out bankers about a pos­si­ble list­ing of its In­dian unit. But the force of Re­liance’s ar­rival in Septem­ber up­ended strate­gic plans, as its chair­man Mukesh Am­bani an­nounced it would pro­vide its mo­bile broad­band ser­vices free of charge for three months — later ex­tend­ing to six. Two months on, Voda­fone wrote down the value of its In­dian busi­ness by €6.3bn, cit­ing the trans­formed com­pet­i­tive land­scape.

At­ten­tion will shift to how much that land­scape will be al­tered once more by this merger. It could usher in a new era for a long-frag­mented tele­coms mar­ket that would now be­come clearly fo­cused on three large groups. Bharti Air­tel, mar­ket leader with 266m sub­scribers, last month ab­sorbed the strug­gling In­dian op­er­a­tion of Nor­way’ s Te­lenor.

“We con­sider this merger to be a game changer for the In­dian tele­com in­dus­try,” said Arun Agar­wal, a part­ner at Al­tavista In­vest­ment Man­age­ment, a share­holder in Voda­fone, ar­gu­ing that it would tem­per com­pe­ti­tion in the space. “This starts the process of re­pair for the in­dus­try struc­ture and will lead to higher in­dus­try prof­itabil­ity.”

The deal terms im­ply an en­ter­prise value of $12.4bn for Voda­fone In­dia and $10.8bn for Idea Cel­lu­lar. Voda­fone will own 45.1 per cent of the merged en­tity, af­ter sell­ing a 4.9 per cent stake to the Aditya Birla group, Idea’s con­trol­ling share­holder, for $579m cash. Voda­fone re­tains its sub­sidiary’s 42 per cent stake in In­dus Tow­ers, In­dia’s largest tele­com masts op­er­a­tor, and will ex­plore a sale.

Voda­fone shares fell 0.6 per cent yes­ter­day and Idea shares by 10 per cent — the lat­ter drop re­flect­ing in­vestor frus­tra­tion, af­ter spec­u­la­tion that Voda­fone would of­fer a takeover pre­mium, said Chris Lane, an an­a­lyst at Bern­stein. The com­pa­nies con­firmed merger talks in Jan­uary, af­ter months of spec­u­la­tion.

Sit­ting along­side Mr Co­lao, Aditya Birla chair­man Kumar Man­galam Birla — who will also chair the merged en­tity — stressed the com­ple­men­tary fit of Idea’s foothold in smaller towns and ru­ral ar­eas, and Voda­fone’s strength in ma­jor cities such as Mum­bai.

But a per­son with di­rect knowl­edge of the Idea board’s de­lib­er­a­tions said that the ad­vent of Jio had been a key fac­tor. “Nor­mally, you don’t en­ter busi­nesses to merge — you like to carry your own flag,” the per­son said. “This would have been dif­fi­cult one or two years ago, be­cause both com­pa­nies were do­ing well by them­selves. But you need to pro­tect your mar­ket share from some­one who’ s be­ing preda­tory, and that eat sup a lot of fi­nan­cial re­sources .”

Mr Am­bani’s ven­ture faces its biggest test next month, when it be­gins charg­ing for the first time, a move likely to lead to the loss of many of the 100m In­di­ans signed up for its free ser­vice.

But an­a­lysts at Edel­weiss Fi­nan­cial Ser­vices pre­dict that Jio will still boast 81 m sub­scribers a year from now, not­ing that its flag­ship prod­uct — a year’s un­lim­ited voice and data ser­vices for Rs303 ($4.60) per month, plus a Rs99 join­ing fee — is still far more at­trac­tive for heavy data users than ri­val of­fer­ings.

Forced to com­pete with Jio’s gen­er­ous pric­ing and re­lent­less in­fras­truc­ture in­vest­ment, Voda­fone’s and Idea’s stated logic for the deal rests heav­ily on the cost sav­ings that they will gain by elim­i­nat­ing over­laps in op­er­at­ing costs and cap­i­tal ex­pen­di­ture. This will yield an­nual sav­ings of $2.1bn by the fourth full year af­ter the deal’s ex­pected com­ple­tion next year, Voda­fone said.

The UK com­pany’s mar­ket val­u­a­tion should also be boosted by the trans­parency that will come from de­con­sol­i­dat­ing its In­dian hold­ings into a sep­a­rate listed en­tity, while re­duc­ing Voda­fone’s net debt by $8.2bn, said Jonathan Dann, an an­a­lyst at RBC Cap­i­tal Mar­kets. The deal “ringfences what is likely to re­main a vo­latile as­set, given [Jio’s] lib­eral use of low prices ”, he wrote to clients.

The merger still faces reg­u­la­tory hur­dles, with In­dian rules man­dat­ing that no op­er­a­tor should con­trol more than 50 per cent of the mar­ket by rev­enue or sub­scriber num­bers in any of In­dia’s 22 tele­com “cir­cles” (ser­vice ar­eas), or spec­trum above spec­i­fied lim­its.

But the new en­tity faces a for­mi­da­ble chal­lenge, said Jayanth Kolla, co­founder of the con­sul­tancy Con­ver­gence Cat­a­lyst. “Their op­ti­cal fi­bre net­work is the biggest chink in their ar­mour,” he said, pre­dict­ing that the merged com­pany would need to in­vest heav­ily to keep pace with Jio’s in­vest­ment in the mo­bile broad­band net­work. See Lex

‘We con­sider this merger to be a game changer for the In­dian tele­com in­dus­try’

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