POWER OF TWO TO TAKE ON JIO
After weeks of hectic negotiations, Vodafone India and Idea Cellular have agreed to merge in a deal valued at $23.2 billion (Rs 1.5 lakh crore), creating India’s largest mobile telephony company with over 395 million subscribers, 35 per cent of the market share and 41 per cent revenue share. The deal, necessitated by the exponential growth in Reliance Jio’s 4G subscriber base (the latest telecom entrant has crossed the 100 million mark), displaces Bharti Airtel as India’s largest mobile telephony company with 265.9 million subscribers as on December 2016. Vodafone India, a subsidiary of the UK telecom giant, had 204.7 million subscribers, while Idea Cellular, owned by the Aditya Birla Group, had 190.5 million subscribers in December.
India has a total mobile subscriber base of 810 million. The deal is expected to be completed by next year, subject to regulatory approvals. Kumar Mangalam Birla, chairman of the Aditya Birla Group, is slated to be the chairman of the merged entity. Vodafone will own 45.1 per cent of the combined entity, Idea will hold 26 per cent, and public shareholders the rest. Shares of Idea Cellular fell over 9.6 per cent on the Bombay Stock Exchange on March 20 after the deal was announced.
The deal is seen as a positive for customers of both Idea and Vodafone, since it marries the financial muscle of Idea’s promoters with the technological edge of Vodafone. The
merger will lead to better infrastructure, better services and better tariffs for the combined entity, which will hold 1,850 MHz of liberalised spectrum, and will be capable of building substantial mobile data capacity.
“When you have a company with topline revenues of over Rs 76,000 crore and market share of 35 per cent, you are in a much stronger position than when alone,” says Prashant Singhal, a partner with EY. The entry of Jio in September last year, using disruptive LTE (Long Term Evolution) technology and offering free voice and data usage till March 2017, had already impacted the profitability of rivals in the telecom market, with Airtel’s profits for the October-December 2016 quarter falling 55 per cent from the year ago period after it slashed tariffs to match up to Jio. Idea, meanwhile, incurred a net loss of Rs 479 crore in the same quarter, its first since going public in 2007.
The merged telecom major will have a giant footprint, with market leadership in 12 out of the 22 circles. It will rank second in nine circles.
It will also likely benefit from operational synergies, which will allow the merged entity to save on expense heads such as energy, customer acquisition, support teams and branding and advertising, according to rating agency Icra. “Earlier, there were 13 operators, as opposed to the present four to five operators. Due to the poor financial health of the sector, we are witnessing mergers, acquisition and consolidation of companies like Idea and Vodafone, Aircel with Reliance Communications and MTS,” says Rajan Mathews, director general of the Cellular Operators Association of India. Much will now depend on how fast the deal gets the government’s nod.