Image courtesy Google
Vodafone Group Plc., the British telecommunications giant said on Monday that it was in talks to merge its Indian operations with rival Idea Cellular to counter the fierce competition in the market. Idea shares have rallied as much as 30 per cent today.
Consolidation in India’s $27 billion telecom industry received a massive boost with Vodafone Group Plc confirming that it is in talks for a merger of its Indian unit with Aditya Birla Group’s Idea Cellular Ltd.
Since its entry in India in 2007, Vodafone has become number 2 operator in the country, but its journey has been tumultuous as it is locked in a legal battle with the government over a USD 2 billion retrospective tax claim over its acquisition of Vodafone India from Hutchison in 2007.
The Aditya Birla group owns 42.2 per cent of Idea while Malaysian carrier Axiata Group Bhd has a 19.8 per cent stake.
It had written down value of business by 5 billion pound (USD 3.35 billion) late last year. The British firm has pumped in more than USD 7 billion into the India unit.
As a fall-out of the announcement, the shares of Idea rose 26% to ₹97.96 in a flat Mumbai market on Monday valuing the company at ₹35,279 crore.
Global telecom giant Vodafone Plc on Monday said it is in talks to merge its Indian operations with rival Idea Cellular to counter the fierce competition in the market. The news sent shares of the Aditya Birla Group-controlled Idea Cellular shares zooming up 30 per cent today. If the merger happens, the Vodafone-Idea combine will be the biggest telecom operator in India, surpassing Bharti Airtel. Vodafone in a short statement confirmed that it is in “discussions with the Aditya Birla Group about an all-share merger of Vodafone India (excluding Vodafone’s 42 per cent stake in Indus Towers) and Idea.”
Kumar Mangalam Birla-led Idea Cellular, in a clarification to the stock exchanges, said, “As part of the exercise, the company has been in preliminary discussions with Vodafone. In view of the fact that the discussions are at preliminary stage, the company is not in a position to share any further details.” The statement added that it was important to mention that the fundamental premise of the preliminary discussion was based upon equal rights between Aditya Birla Group and Vodafone in the combined entity.
Allan C. Nichols, Equity Analyst at Morningstar said he liked the idea of the merger, as there were far too many operators in the country and that this trend had prevented good returns. “We think this merger also demonstrates the difficulty that (Reliance) Jio’s entrance has caused for the Indian wireless telecom market,” Mr. Nichols said.
Consolidation in India’s $27 billion telecom industry received a massive boost with Vodafone Group Plc confirming that it is in talks for a merger of its Indian unit with Aditya Birla Group’s Idea Cellular Ltd.
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.
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 services in September, Reliance Jio has offered free voice and data and signed up more than 72 million users, forcing rivals, including Vodafone India Ltd and Idea, to slash tariffs in response.
“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.”
In a statement to the London Stock Exchange on Monday, Vodafone Group Plc said it’s exploring an all-share merger of Vodafone India, excluding its 42% stake in Indus Towers, with Idea.
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 Reliance Jio’s user base will prevent the merged entity from breaching the subscriber base limit, said a telecom industry analyst, requesting anonymity.
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 Cellular has a weak footprint.
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 MHz band and in Gujarat and Maharashtra in the 2500 MHz band. The merged entity could sell the additional spectrum in almost five circles to Bharti Airtel or Reliance 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, depreciation, taxes and amortization) of 9-12% as a result of synergies in operating expenditure arising from the merger.
Reliance 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 the 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.
