Vodafone Idea: India's largest telco is born with 41% subscriber share

Telecom incumbents Vodafone and Idea have announced their merger of operations to form India's largest telecom company with a subscriber base of 408 million.

The merged entity, which will be called Vodafone Idea, has almost 41 per cent subscriber share and will have a revenue market share of 32.2 per cent in the world's second largest telecom market. The two had announced their merger over a year ago but got the approval of the National Company Law Tribunal earlier in the week.

The company starts on a strong wicket with revenue leadership in nine telecom circles and the highest number of subscribers in 12 circles. In addition to improvement in its competitive position in the midst of a severe pricing war, the merger is expected to generate Rs140 billion in annual savings, including operating expenditure synergies of Rs 84 billion. While the merger has come through, the two brands, customer plans and distribution network will continue to have a distinct presence. The firm indicated that this was done given a strong consumer affinity across metro, urban, rural, and deep interior markets.

The company appointed new board of directors comprising 12 members, with Aditya Birla Group Chairman Kumar Mangalam Birla as the chairman. Balesh Sharma has been named the CEO of the merged company.

The immediate priority will be to consolidate its position across the range of service offerings. Balesh Sharma, CEO, Vodafone Idea, says: “As India's leading telecom operator with two popular and loved brands, the company has the scale and resources to ensure sustainable customer choice and introduce new technologies. We are committed to offer both our retail and enterprise customers an excellent experience while fulfilling their evolving digital and connectivity needs via new products, services and solutions. 

The new entity will start with a cash balance of Rs 193 billion from equity infusion of Rs67.5 billion by Idea and Rs86 billion by Vodafone. The sale of telecom towers by the two fetched Rs78.5 billion. The cash with company is after paying the telecom department Rs39 billion in dues. 

“The merger will bestow two relatively immediate benefits — network capacity increase due to spectrum pooling (around 50%) and lower tower rentals. With a robust spectrum portfolio in urban markets, the mergeco is unlikely to be a pushover," says Srinivas Rao of Deutsche Bank Research. 

It is a dominant leader in eight markets and a strong player in five (close to top two positions), which account for 65 per cent of the sector, according to Rao. While it will have a large base and spectrum resources, there are concerns about its ability to retain its revenue market share given the competitive market. Viju K George and Akash Verma of JP Morgan believe it will be an uphill climb, especially given that Jio is unlikely to relent on pricing. 

“The big picture call is not so much cost/capital reduction but really revenue recovery, which allows for operating profit to materially dent leverage ratios,” they add. 

Analysts have asserted that with a net debt of over Rs1,092 billion the new company will not be a position to go aggressive on pricing. It will have twin challenges of limiting the damage to its rural subscriber base from the Jio threat while at the same time protect its profitable higher average revenue per user base from competition.