Vodafone tie-up to create a leader
• Group’s Indian unit in tie-up talks with Idea Cellular and weighing options on excess airwaves in the country
A merger under discussion between Vodafone Group’s India unit and Idea Cellular would create a new leader in one of the world’s most competitive cellphone markets. For rivals, there is a silver lining — bandwidth on the cheap.
A merger under discussion between Vodafone Group’s India unit and Idea Cellular would create a new leader in one of the world’s most competitive mobile-phone markets. For rivals, there is a silver lining: bandwidth on the cheap.
That is because a transaction may compel the carriers to shed some spectrum and subscribers to ensure regulatory approval under India’s competition rules.
Vodafone and Idea are weighing options on excess airwaves, including selling or sharing them, according to people with knowledge of the matter, who asked not to be identified because the plans are private.
Spectrum worth more than 60-billion rupees ($890m) could be at stake, according to Credit Suisse analysts. The two carriers would probably sell the spectrum at a lower price than originally purchased, Sunil Tirumalai and Viral Shah wrote in a February 1 note.
Such disposals could make it more difficult for Idea and Vodafone to take advantage of their combined scale because India is divided into 22 geographic circles, meaning a carrier needs critical mass in each to maximise pricing power within that circle. The two carriers have airwaves in five such circles that exceed the regulatory limit of 50% per band and 25% across all bands, according to Credit Suisse, which estimates that the proposed merger has a 60% chance of going through.
Vodafone’s India unit and Idea declined to respond to questions.
On average, consolidators lose 2%-3% of market share within two years of merging, according to Sanford C Bernstein, which cited examples in Australia and in Ireland.
Carriers need more spectrum to improve service quality and extend coverage. In October, a government auction of airwaves flopped as debtstrapped rivals deemed prices too high. Vodafone’s India unit was the biggest spender at the sale, which raised about 658billion rupees towards a target of 5.6-trillion rupees.
An opportunity to acquire bandwidth at a discount could benefit carriers from Bharti Airtel, the largest wireless carrier, to Telenor ASA’s Indian unit, or Tata Teleservices, the mobile phone business of the steel-tocars conglomerate Tata Group. India has 11 mobile-phone companies serving more than 1billion subscriptions.
Vodafone CEO Vittorio Colao has been looking to separate the Indian unit, which has become a drag on earnings. In addition to a $5bn writedown in November, the carrier was forced to pump more than $7bn into the business in 2016 as a price war pushed down earnings.
The group on February 2 cited the Indian unit as a reason full-year profit would probably be towards the bottom of its 3% 6% growth range.
Pressure to consolidate among Indian carriers has escalated since Reliance Jio Infocomm, controlled by India’s richest man, introduced free calling and data services in September 2016.
Vodafone’s Indian unit is the number two carrier in the country and Idea is third. A merger would create an operator with 387-million subscribers, a 36% market share and airwaves for 4G services spanning the entire country. Vodafone would also gain a listing in India, which it has been considering since at least 2011. Vodafone has said that the deal would not include its 42% stake in Indus Towers.
Prior to Jio’s entry, Bharti Airtel, Vodafone and Idea were able to increase revenue and profit, even as they borrowed heavily to pay for spectrum and infrastructure.
Billionaire Mukesh Ambani plans to invest a further 300billion rupees in Jio, in addition to more than $25bn already ploughed into the carrier, to expand the network coverage and capacity, it said in January.
In December, Jio said it would offer free data until March 31, extending the period by three months.