The Vodafone Idea crisis is showing no sign of being resolved. One option being explored to save the operator from total collapse is a possible merger with state-owned Bharat Sanchar Nigam Limited (BSNL).

The idea further gathered pace when Kumar Mangalam Birla, chairman of Aditya Birla Group, which owns around 27% of Vodafone Idea, offered to give up its stake to ensure that Vodafone Idea continues to operate.

While Vodafone Idea is India's third-largest service provider, BSNL provides services in all the circles (service areas), except Delhi and Mumbai.

Figure 1: Closing time: As the odds stack up against Vodafone Idea, could a merger save the service provider from shutting up shop?
(Source: Arti Sandhu on Flickr, CC 2.0)

Vodafone Idea is against the wall because of a considerable debt of INR1800 billion (US$24.18 billion) and a limited cash reserve of INR3500 million ($47.02 million).

The debt is mainly because of the Supreme Court's judgment in 2019 which included non-telecom service revenue as part of the Adjusted Gross Revenue (AGR) of the service providers.

The synergies

A merger with BSNL comes with several challenges and opportunities.

The biggest synergy between the two is that while BSNL is yet to launch 4G services, Vodafone Idea is already offering them across the country. It might lead to faster adoption of 4G services in rural areas.

And while Vodafone Idea has a strong presence in metro and urban cities, BSNL is known to have a good network in rural areas – where it is sometimes the only service provider.

For BSNL, however, this is also on offer through the proposed merger with MTNL, a government-owned telco that provides services only in Delhi and Mumbai. The merger between BSNL and MTNL was put on hold some time back.

While there might be some duplication, both Vodafone Idea and BSNL have extensive fiber networks. Added to this, BSNL has a significant presence in wired services, which is not Vodafone Idea's forte.

The merged entity, if managed properly, could be strong competition for Bharti Airtel and Reliance Jio, which are enhancing their presence in this segment.

The merger will also help avoid a duopoly in the Indian telecom industry.

...And the not so synergistic

The biggest problem in the merger between Vodafone Idea and BSNL is that culturally they are very different. While BSNL is highly bureaucratic, Vodafone Idea is run like a corporate. It is hard to imagine Vodafone Idea as a public sector company.

It would be tough for the merged entity to decide the best approach to address workforce-related issues.

Being a public sector company, BSNL's employees are entitled to a pension and enjoy job security, which is not true for Vodafone Idea's workforce. It will be tough to find middle ground.

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While BSNL has significantly reduced its workforce by offering a voluntary retirement scheme (VRS), it still has a massive workforce of around 65,000 (as of December 2020). BSNL also has a workers' union which might object to the merger unless and until its demands are met.

Vodafone Idea has a significant percentage of high-value subscribers and there might be an exodus of this segment to Airtel or Jio if it is merged with BSNL.

Last, but not least, merging two struggling companies might not be the best solution to revive them. The pain of merging might only add to their struggles instead of resolving them.

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— Gagandeep Kaur, contributing editor, special to Light Reading