New Delhi/Mumbai: India will soon have a new No. 1 telecom operator with the department of telecommunications (DoT) giving its final approval to a proposed merger of Vodafone India and Idea Cellular. The new merged entity will overtake Bharti Airtel as India’s largest mobile phone operator.

“We have given final approval for the merger as the companies have paid the required dues," a senior official from the DoT said, requesting anonymity.

The department had on 9 July raised a demand for 3,900 crore in cash and 3,300 crore in bank guarantees towards one-time spectrum charges to be paid as part of the merger and acquisition guidelines.

One-time spectrum charges are payable by companies which want to convert their administered spectrum or spectrum that was not acquired through auction to liberalised or auctioned spectrum. Auctioned spectrum can be deployed flexibly for any purpose, unlike administered spectrum.

The approval creates a new entity, Vodafone Idea Ltd, in the hyper-competitive telecom sector and take on billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. Since its launch in 2016, Jio has ushered in a price war hurting the revenue stream of existing operators.

The merged entity will have to apply at the Registrar of Companies to register Vodafone Idea Ltd and wait for DoT to transfer licences of both operators to the new company.

“Vodafone’s bank guarantees towards yearly instalments of payments of spectrum will need to be replaced by Idea," said the official cited above. “Banks will need to amend the guarantees. The companies will start this process now. Rest all conditions have been adhered to."

Emails sent to Vodafone and Idea remained unanswered at press time.

The nod from DoT paves the way for Vodafone and Idea to start realizing synergies from cost optimisation and through in consolidation of network sites, a crucial factor given the capital intensive nature of the business and sustained pricing pressure from Jio. With reversal of overlapping spectrum, and with large spectrum chunks at disposal, the merged entity will be able to roll out faster data.

However, the merger will come with its own set of challenges, with the biggest being the debt burden.

Mumbai-based brokerage Motilal Oswal Securities said in a 29 June report that Idea is expected to have a debt of about 1.2 trillion by the end of this fiscal year, necessitating additional fund-raising.

As part of the merger pact, Idea needs to buy stake in Vodafone for a period of time. Idea’s best bet would be to raise equity from outside investors as debt would be more expensive. They will also bank on the proceeds realised from monetizing their stakes in the Bharti Infratel-Indus Towers proposed merged entity. “The key challenge for them is how fast they can show an improvement in their Ebitda," according to the Motilal Oswal report.

“Investors will wait for clarity on how they will service the debt apart from the requirement for capex each year and how that will be funded," a Mumbai-based telecom analyst said, requesting anonymity.

The merged entity’s capex requirement could be lower than rivals Airtel and Jio given the excess capacity integrated through the merger but that would not necessarily make it easy for it to raise money.

Another challenge for them would be the branding exercise. The companies will most likely run both brands Vodafone and Idea for some time before shifting into a single brand to control marketing costs and have a definite sales strategy.

“Why would we want, say an Idea user in Madhya Pradesh, where Idea brand is strong, to move to Vodafone. Ultimately, of course, we will move to a single brand but we will have to align the back end for it before doing it on the front end," a top official of the merged entity said requesting anonymity.

Vodafone India and Idea had in March outlined the key leadership team to head the merged entity. Aditya Birla Group’s chairman Kumar Mangalam Birla was named non-executive chairman of Vodafone Idea Ltd while Balesh Sharma, currently the chief operating officer of Vodafone India, was named chief executive officer.

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