Idea-Vodafone merger faces major hurdles
Revenue leakage due to the merger and lack of full synergy due to Vodafone and Idea Cellular existing as separate brands under a combined entity likely to weigh in
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New Delhi: Vodafone India Ltd and Idea Cellular Ltd may have announced an ambitious merger plan but how they handle a host of issues—regulatory and cultural in nature—will determine the success of the deal.
Experts said some of the risks associated with the merger and acquisition (M&A) process and subsequent integration include clash of cultures, confusion about brand identity, distractions faced by top management and key employees, and impact on morale of employees amid apprehensions of job safety.
“Mergers are complicated in the best of times. Synergies are only delivered if staff are let go, network overlaps eliminated or redeployed elsewhere, brands integrated and marketing budgets reduced. All of these are disruptive at the best of times, and in almost all cases result in share loss,” Chris Lane, an analyst with Hong Kong-base Bernstein Research, wrote to investors on 21 March.
Lane emphasized that there will be incremental loss of revenue market share and subscriber base of the combined entity as it attempts to address these issues across 22 circles in India and that too in the middle of a fierce price war.
“We expect they will lose 5% revenue market share in FY18 (as Jio starts charging) and a further 2% during the network integration period. This implies their combined subscriber share will fall from the current 40% reported to 34.6% by March 2018,” Lane wrote in his report.
JP Morgan Asia Pacific Equity Research said that notable among the risks is that of a unified brand.
“If one of the brands (such as Vodafone) is extinguished and the merger envisages a single brand (say, Idea), it will be interesting to see how the Idea brand and execution resonates in the key circles where Vodafone is more dominant/focused and Idea less so,” JP Morgan said.
“In the near-to-medium term (say, over the next 6-18 months), the cited risks to the merger may cause some share loss. In our view, Bharti (Airtel) can make the most of the revenue leakage from the potential merger,” it added.
Both Idea and Vodafone have said that they plan to retain both the brands in the Indian market, which Credit Suisse found “intriguing”.
“This may prevent the full extent of synergies to be realized when two competing brands from the same company are out in the market. We suspect this announcement could be more to do with keeping up employee morale (and eventually one of the brands might be dropped),” it said.
“Unlike a soap or a shampoo category, a customer is not making a brand decision every month when it comes to a telecom operator. However, in order to attract new consumers they (Vodafone and Idea) will have to think about a unified branding strategy, otherwise they will end up wasting money in creating communication around two different brands,” said Ambi M.G. Parameswaran, a brand strategist and founder of Brand-Building.com.
The current market leader, Bharti Airtel Ltd, has a revenue market share of 33%. The $23 billion Vodafone-Idea merger will create India’s largest telecom firm, overtaking Bharti Airtel Ltd. It will have almost 400 million customers.
Naval Seth, an analyst at Emkay Global Research, said that since the merger is the largest in the industry, the regulatory approvals could take longer.
“Government/regulator would ask the companies to pay one-time excess spectrum charge of Rs50 billion (combined); the matter is currently under litigation. The government might also want resolution on Vodafone’s pending tax irregularity case before it would give a go-ahead,” Seth said.
The Idea management, in an analyst call on Tuesday, said that the Vodafone tax issue is not on the Indian entity, and therefore it would not derail regulatory approvals.
The combined entity is seeking approvals from the Securities Exchange Board of India and the National Company Law Tribunal, and at least four government institutions.
The agreement between Idea and Vodafone contemplates completion of the proposed deal within 24 months.
“CCI (Competition Commission of India) alone may take anywhere between 45 days to eight months to approve such a merger,” said an executive from a rival company. “Taking approvals from authorities is an easier said than done business in India,” the person added.
Saumya Tewari contributed to this story.