Vodafone dials Idea for merger

If it happens, merged entity will become India's number one player with 43% market share

UK-based telecom giant Vodafone said on Monday it was in talks for an all-stock merger of its unlisted Indian subsidiary with rival Idea Cellular. 

This would make the merged entity India’s largest telecom company in terms of revenue, at 43 per cent. It will also become a leading global telecom firm in terms of number of subscribers, at 387 million.

“Any merger would be effected through the issue of new shares in Idea to Vodafone and result in Vodafone deconsolidating Vodafone India,” the British company stated. 

The talks between Vodafone and Aditya Birla (AB) Group-owned Idea Cellular were triggered mainly after the launch of Reliance Jio. 

The Reliance Industries-owned subsidiary has invested close to Rs 1,50,000 crore in its wireless services operations and plans to invest Rs 31,000 crore more in the coming years — making the growth outlook of existing players extremely weak. The free services by Jio have already garnered 72 million subscribers. 

Vodafone was earlier in merger talks with Tata Teleservices but did not go ahead, citing its own listing plans. After a merger with Idea, a listed entity, Vodafone shares would also be up for trading.

 

Idea Cellular stated, “The fundamental premise of preliminary discussions is based on equal rights between the AB Group and Vodafone in the combined entity.” 

Besides management control of the merged firm, one of the issues to be negotiated with Vodafone would be the future of the ‘Idea’ brand name. Insiders said it was likely to be dropped by the merged firm.

The merger is important for both the struggling players.

"Vodafone’s subscriber growth has long exceeded our projections but it has struggled to translate it into earnings and cash flow. Over the past two years, the market was beginning to recover from previous price wars, only to see RJio revive them," said Allan Nichols, equity analyst of Morningstar Equity Research. Vodafone had to take a massive $5.5 billion write-down on its India investments in November. At the same time, with falling return on capital employed across group companies, the Birlas are not keen to invest more in the cash-guzzling telecom business, insiders said.

"Not only would the combined entity become an industry leader but also a strong competitor in the data market with 3G spectrum across India and the highest 4G spectrum in the 1,800-MHz band, enabling sufficient capacity spectrum," global brokerage firm CLSA said in a report on January 18.  The deal, however, could face trouble over the breach of legal spectrum limits. This would force the merged entity to sell spectrum in five of the country's 22 circles. 

"The merged entity would get a year to align with revenue and subscriber market share caps but would have to part-sell or surrender spectrum to be below the cap. The new entity would have to pay Rs 5,700 crore to liberalise its administered spectrum, which would be offset if the merged entity can sell excess spectrum worth Rs 5,400 crore," an analyst said.  

At the same time, analysts say there would be a lot of synergy benefits. For almost 25 per cent of the combined entity's sites would become redundant and help improve earnings. "We estimate 50 per cent of these sites could be redeployed, driving incremental revenues of Rs 2,600 crore, with shutdown of the remainder cutting network costs by Rs 2,700 crore annually. Ebitda (earnings before interest, tax, depreciation and amortisation) would be 25-30 per cent above the current Idea and Vodafone India sum, assuming 10 per cent saving in employee costs, along with network cost savings," CLSA said.  In the first half of the current financial year, Vodafone and Idea's combined revenue was Rs 41,362 crore, with Ebitda of Rs 12,796 crore. The combined entity's net debt would be Rs 1,05,587 crore, as of September 2016. 

Vodafone clarified that the proposed merger would not include its 42 per cent stake in Indus Towers, a three-party venture with Bharti Airtel and Idea Cellular. 

Idea's stock went up 26 per cent to close at Rs 97.95 a share. Aditya Birla Nuvo's scrip rose five per cent at Rs 1,435. Vodafone's shares were up 2.5 per cent on the London Stock Exchange. Shares of top telecom player Bharti Airtel, with 33 per cent market share, were up 7.5 per cent with investors betting on consolidation in the industry. Amresh Nandan, an analyst with Gartner, said: "Both Vodafone India and Idea have to figure out their long-term business strategy and a merger could well be the path, given current industry competitiveness and dynamics."