India, like China, will soon have three large mobile telcos
The impending Vodafone-Idea merger will accelerate the consolidation of India's $27 billion telecom industry
India is adopting the China model for its telecom industry: a massive consolidation has begun, with UK's Vodafone Group and the KM Birla-owned Idea Cellular confirming their initial talks to merge their businesses in a cashless deal that could create the country's largest cellular operator by subscribers and revenue.
The combine will have a 43% revenue market share and over 390 million subscribers, in comparison to Bharti Airtel's 33% market share and 266 million subscribers. The merger will result in the Indian telecom landscape being dominated by three strong private firms along with the state-owned BSNL.
According to an Economic Times report, the Birla company, now in third place, wants equal rights with second-placed Vodafone, which will hold 50% or less in the merged entity. Vodafone will be issued fresh shares of Idea, which will continue to be listed. This will result in Vodafone's Indian business ceasing to be a subsidiary of Vodafone Group Plc, which then won't have to consolidate its Indian unit's numbers, including debt and losses, into its own financials.
Vodafone will buy into Idea through a share swap, but will keep its stake at 50% or below in the combined entity. ET reported that if Vodafone PLC was to hold 50% or less in the merged entity and if the Birlas were to hold equal rights, it's possible that another investor would be inducted into the company. This investor could buy a portion of Vodafone PLC's stake and also infuse fresh capital into the company. But this could not be confirmed.
Both companies cautioned that talks were at a preliminary stage and there was no guarantee that they would result in a merger.
The merger will result in Vodafone, which has been thinking and talking for years about an IPO for its Indian arm, finally being able to create a tradable market value for its Indian operations. Idea, in which Malaysia's Axiata owns around 20%, has a market capitalization of over Rs 350 billion.
The combination will also give the merged entity substantial spectrum muscle, for example, nearly 28% of the spectrum in the key Delhi and Mumbai markets where Idea Cellular has a weak footprint.
On the flip side, the combined entity will have a debt of Rs 720 billion. Vodafone is also embroiled in a multi-billion-dollar tax dispute with the Indian government.
Besides, the post-merger combined entity could face practical implementation issues, including an estimated cost of Rs 20-30 billion associated with liberalizing the spectrum, which would go to the government.
The telecom department has 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. The combined entity would breach spectrum caps in five circles, the market value of which comes to Rs 75 billion, and some spectrum would have to be returned. Besides, the combined entity will exceed the maximum user base limit of 50% in as many as nine license areas and revenue market share will surpass the 50% threshold in five circles.
Still, the strategic benefits exceed these transition costs. "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 says. The brokerage suggests 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.
The merger proposal was triggered by the entry of Reliance Jio, in which parent Reliance Industries Ltd has invested as much as $25 billion. Since the launch of services in September, Reliance Jio has offered free voice and lower-rate data and signed up more than 72 million users, forcing rivals, including Vodafone India and Idea, to slash tariffs in response. Vodafone had last November said it had written down the value of Indian business by EUR5 billion, due to increased competition sparked by Jio's entry.
The event could hasten further consolidation of the industry: Reliance Jio is already sharing almost every network component with Reliance Communications, and the latter has agreed to acquire Sistema's Indian mobile phone operations. It has also agreed to combine its wireless business with Aircel, majority owned by Malaysia's Maxis. Meanwhile, Bharti Airtel is reportedly in talks to acquire Telenor's Indian operations. Loss-making Tata Teleservices is looking for a best-fit buyer.
India remains a capital-intensive market. Spectrum costs are high and big investments in network are needed to cover a vast geography. At the same time margins are wafer-thin, as carriers offer one of the world's cheapest data and voice prices. "If it eventually becomes a market of three players, good for them. They will make money," said a banker. "I don't see any future for the small ones. They will be taken over or will exit the market."
From reports in Economic Times, LiveMint