The proposed merger will create the nation’s largest telecom firm with combined revenue of Rs78,000 crore and a 43% share of the market hitherto dominated by Bharti Airtel Ltd, which reported annual revenue of Rs50,008 crore from local telecom operations in the last financial year.
“Vodafone confirms that it is in discussion with the Aditya Birla Group about an all share merger of Vodafone India (excluding Vodafone’s 42% stake in Indus Towers) and Idea," British company Vodafone Group said in a statement to the London Stock Exchange on Monday.
With Vodafone India Ltd’s tower unit out of the proposed merger, Vodafone Group and the Aditya Birla Group will be almost equal partners. The two would have equal rights in the new company, said Idea.
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The consolidation has been triggered by the entry of Reliance Jio Infocomm Ltd, in which parent Reliance Industries Ltd has invested a staggering $25 billion.
Since the launch of its services in September, Jio has offered free voice and data and signed up more than 72 million users, forcing rivals, including Vodafone India and Idea, to slash tariffs in response.
Vodafone Group had to write off €5 billion in its Indian business last year and defer a proposed share sale which will become irrelevant should the merger go through; Idea is already listed on the exchanges and the merged entity will automatically be listed.
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“When a rival with deep pockets enters the market with an investment as huge as Rs1.5 trillion, and starts offering free services, it is bound to put pressure on others," said Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd. “Consolidation makes sense in such times."
The combined entity will exceed the maximum user base limit of 50% in as many as nine licence areas and revenue market share will surpass the 50% threshold in five circles, according to a telecom analyst who declined to be named.
That, analysts say, is unlikely to pose a significant hurdle for the merger.
The rapid expansion of Jio’s user base will prevent the merged entity from breaching the subscriber base limit, added the analyst cited above.
The combination will also give the merged entity substantial spectrum muscle—nearly 28% of the spectrum in the key Delhi and Mumbai markets where Idea has a weak footprint.
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The telecom department rules restricting an entity’s holding to no more than 50% of the spectrum in a given band and 25% of the spectrum assigned in a circle would mean that the merged entity would have to surrender spectrum in Kerala in the 900 megahertz (MHz) band and in Gujarat and Maharashtra in the 2,500MHz band. The merged entity could sell the additional spectrum in almost five circles to Airtel or Jio.
“We believe that a potential Idea/Vodafone merger could make strategic sense (move to No.1 market share, scale/synergy benefits, and complementary footprint with Vodafone strong in urban areas and Idea strong in rural areas)," Bank of America Merrill Lynch said in a note on Monday. The brokerage suggested that the merged entity would realize an increased Ebitda (earnings before interest, taxes, depreciation and amortization) of 9-12% as a result of synergies in operating expenditure arising from the merger.
Jio’s entry has also forced rivals to make huge investments, leading to mounting debts for all operators.
“With current level of wafer-thin margins, it is uneconomical to invest more in acquiring contiguous territories, spectrum or upgrade into 4G or LTE technology. Hence, consolidation is inevitable," said Singapore-based Sanjay Guglani, chief investment officer at Silverdale Funds.
Idea’s net debt is expected to cross Rs55,000 crore by the end of March 2017. Its second-quarter profit for financial year 2017 fell 88% to Rs91 crore from Rs762 crore in the year ago period. Analysts says that Idea’s December quarter performance could be worse. The company was due to announce its third quarter results on 23 January but told stock exchanges it has postponed it without further notifying when the results would be published. For Vodafone, net debt was at Rs76,800 crore for the half year ended September 2016. That came down to Rs35,430 crore in November after an infusion of Rs47,700 crore from the parent.
“As far as debt in concerned, from a lenders’ perspective too, a merger would be encouraged. High debt of a company with larger market share is always a better idea than high debt of two different players with lower individual market share," Bodke said.