British telecom major Vodafone Plc has announced talks of a merger with industrialist Kumar Mangalam Birla's Idea Cellular. Once the merger goes through, it will become the combined entity of the largest telecom company of India. "This could unlock $9 billion in potential synergies and offer an elegant route for Vodafone to deconsolidating India, thereby focus attention back onto a rebounding European equity story," said New York-based financial services firm JP Morgan.
The merger means just three big telecom players in India, Airtel, Vodafone-Idea, and Reliance Jio, other than state-owned BSNL. The merged entity will hold revenue marketshare of 42 per cent, overtaking Airtel, which has 31.4 per cent. Both Vodafone and Idea combined, will have more spectrum than any other telecom operator, and can focus its investments in offering cheaper high-value products to its customers. "The combined entity will have best-in-class coverage as well as capacity spectrum," said Singapore-based PhillipCapital. "The combined entity will have to give up spectrum in 900 MHz and 2500 MHz; the spectrum in 900 MHz in 17 out of 22 circles contributing more than 90 per cent of industry revenues will be significant competitive advantage... The spectrum requirements for the combined entity will reduce significant over the years to come."
Analysts believe Reliance Jio's entry delayed the merger. "Jio's disruptive free distribution of SIM cards" was a catalyst," said analysts. American financial services firm Bernstein wrote, "The merger would be achieved through an issuance of Idea shares to Vodafone, with Vodafone technically ceding control of its Indian operations and hence deconsolidating Vodafone India." While it does not indicate an end on the price war between large telecom operators, it may be the beginning of a bitter battle. "We see a three player mobile market more sustainable in the long-term, as it can also accommodate Jio's market share aspirations while ensuring profitability for all majors. While voice or data pricing and ARPUs will continue to decline for the next few quarters, we will see room for ARPUs to go up, once Jio gets a decent revenue scale and achieves EBITDA positive," read a report by JM Financial.
As per Indian regulations, a telecom operator cannot have more than 50 per cent revenue share in any circle. However, Idea, in its filing to the Bombay Stock Exchange, said that the premise of the merger talks is based on "equal rights" in the merged entity.