Idea Cellular ‘Best Fit’ For Vodafone India: CLSA
Potential merger of Vodafone India, Idea would change the industry order: CLSA
A potential merger of Vodafone India Ltd. and Idea Cellular Ltd. would dethrone Bharti Airtel Ltd. in revenue market share and create a new leader in the Indian telecom landscape.
That’s the verdict coming in from global brokerage CLSA, which expects the merger to result in a combined revenue market share of 43 percent, significantly higher than Bharti Airtel’s current share of 33 percent. The merged entity will also have the highest spectrum holding across the industry.
Market has been abuzz with reports of a potential merger, but neither Vodafone India nor Idea Cellular has confirmed any news reports. “A merger with Idea Cellular would be the best fit for Vodafone India, particularly as the two operators’ operational strengths are complementary,” according to CLSA.
India is the world's second-biggest mobile phone market by subscriptions, behind China, but high competition in the crowded market has kept profits under pressure.
Potential Deal Challenges
The potential alliance could face regulatory challenges, warns CLSA.
According to merger and acquisition (M&A) guidelines in the telecom sector, an M&A is allowed only if the percentage of adjusted gross revenue market share of the merged entity does not exceed 50 percent in any particular circle. The guidelines also specify that the combined entity should have less than 50 percent of spectrum in each band individually in addition to having less than 25 percent of the spectrum allocated to all operators in all bands in all circles.
CLSA points out that a merger between Vodafone and Idea would breach the revenue market share ceiling in five circles out of the 22 circles.
The merged entity would also end up having excess spectrum in five circles across two bands -- 900 MHz and 2,500 MHz.
Though the merged entity would get a year to align with revenue market share and the spectrum caps, the excess spectrum could be a concern in this deal.
However, the other excess spectrum would have to be sold to comply with spectrum caps. This could be a key challenge.CLSA Report
CLSA estimates that the combined entity could raise as much as Rs 5,400 crore from the sale of excess spectrum, but it would have to shell out Rs 5,700 crore to liberalise its administered spectrum.
In the event of a merger or acquisition, the acquirer will have to liberalise the spectrum held or surrender the same to the government, according to DoT’s guidelines. Liberalised spectrum allows telecom operators to use any technology to deliver mobile services like 3G and 4G.
Intense Competition
Competition is expected to intensify in India, where telecom services are one of the cheapest in the world and carriers’ margins are lower than in developed markets.
…the merger would create a new leader in the mobile, data industry challenging both Bharti Airtel and Jio and hence further intensify competition.CLSA Report
Deal Synergies
Despite the above challenges, the potential merger would drive incremental revenues of Rs 2,600 crore, with a reduction in network costs by Rs 2,700 crore annually, CLSA estimates. Also, core profit or earnings before interest, taxes, depreciation and amortisation would be 25-30 percent above the sum of what Idea and Vodafone India currently earn.
A deal could boost the merged entity’s EBITDA by 25-30 percent led by savings in network and SG&A (Selling, General and Administrative) costs.CLSA Report
If the merger goes through, the CLSA expects Vodafone India to shelve its initial share sale plans, since it would allow Vodafone Group Plc to initiate “a backdoor listing of its business without going through an IPO process.”
