Vodafone Plc. has confirmed that it is in talks for a potential merger of its Indian unit with Aditya Birla Group’s subsidiary Idea Cellular Ltd. to create the country’s largest mobile services operator.
The deal would exclude Vodafone’s 42 percent stake in Indus Towers, a statement filed in the London Stock Exchange said. Indus Towers, a telecom infrastructure provider, is a joint venture between Vodafone India, Idea Cellular and Bharti Airtel Ltd.
Any merger would be effected through the issue of new shares in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India. There is no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction.Vodafone Group Plc’s Exchange Filing
Idea Cellular Ltd. also issued a statement on Indian stock exchanges soon after, confirming that the two telecom operators were engaged in preliminary talks. According to the statement, any merger, if at all, would be based on equal rights between the two entities.
It is important to mention that the fundamental premise of preliminary discussion is based on equal rights between Aditya Birla Group and Vodafone in the combined entity.Idea Cellular’s Exchange Filing
Idea Cellular’s shares rallied up to 29 percent to Rs 100.5 following the announcement. This is the highest intraday gain Idea has seen since listing.
Bharti Enterprises Ltd. Chairman Sunil Bharti Mittal had told BloombergQuint on January 20 that a merger between Vodafone India and Idea Cellular, if it were to materialise, would be a ‘perfect match’. Mittal was speaking to BloombergQuint’s Menaka Doshi on the sidelines of the 47th World Economic Forum at Davos.
It’s a perfect match, if you look at it, the match is not bad. But you know I can’t sit on the minds of Vittorio (Colao) or Kumar (Mangalam Birla). The strength and weaknesses match very well. Rural - urban, structured portfolio...makes for a good business case and I would support it.Sunil Bharti Mittal, Chairman, Bharti Enterprises
If The Merger Does Take Place
According to BloombergQuint's calculation, the merged entity would become the country’s largest telecom operator, holding around 1,120 megahertz of spectrum across five bands.
The possible merger will need to be approved by the Department of Telecommunication (DoT) and Telecom Regulatory Authority of India (TRAI) though.
Merger and acquisition guidelines in telecom state that merger is allowed only if the adjusted gross revenue percentage and subscriber base of the merged entity does not command more than 50 percent of the market share in a particular circle. It also specifies that the combined entity should not hold more than 50 percent of spectrum in each circle. Similarly, there is cap on the total spectrum held by the merged entity, which has to be not more than 25 percent of the entire spectrum available in the country.
The merged entity will have excessive spectrum in five circles - Maharashtra, Gujarat, Kerala, Haryana, and Uttar Pradesh (West), which means that the excess holding will have to be pared, for the regulators to approve the deal. Brokerage houses who have been coming out with reports on the potential merger for some time now, have come out with different options. CLSA in its report dated January 17, 2017 had valued the total excess spectrum at Rs 5,400 crore. ICICI Securities, which also came out with a report on January 23, 2017 said that it would be difficult for the merged entity to sell the excess spectrum held in the 900 MHz band, which in turn would mean that it “had to be returned to the government with out any refund.”
The aggregate revenue market share of the entity will also breach the 50 percent cap in seven circles - Mumbai, Maharashtra, Gujarat, Kerala, Haryana, Uttar Pradesh (West). The combined aggregate revenue market share stands at exactly 50 percent, as of September 30, 2016.
The merged entity will be market leader in 12 out of the present 22 circles. The subscriber data base as of October 2016 suggests that the subscriber cap would be breached in five circles - Maharashtra, Gujarat, Kerala, Haryana and Uttar Pradesh (West). The combined consumer base of the two telecom operators stands at 380.7 million as of October 31, 2016, with a market share of around 43 percent.
Analysts’ Take
Reliance Jio Infocomm’s arrival and its extended free offerings may have prompted Vodafone India and Idea Cellular to fast-track possible merger talks according to some analysts.
Mahesh Uppal, Telecom Analyst at ComFirst India says consolidation in the telecom space will be a welcome move, specially for players like Vodafone and Idea who have been facing the heat from other players.
Given the serious competitive threats Vodafone India and Idea Cellular face, they would welcome one less player to compete with.Maesh Uppal, Telecom Analyst, ComFirst India
Fitch Ratings director Nitin Soni says the possible merger would be beneficial for the entire telecom industry.
This merger will not only benefit Vodafone India and Idea Cellular, but the whole industry. In short term they might face difficulty with (Reliance) Jio offering free services, but for the long term it will be beneficial.Nitin Soni, Director, Fitch Ratings
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