Vodafone, Idea Could Merge This Week – Reports

The $22.4 billion merger between Vodafone India and Idea Cellular, India's second- and third-biggest operators, is due to be announced this week, according to press reports, following several weeks of discussions between the two companies.

A merger between Vodafone India and Idea Cellular Ltd. would dethrone Bharti Airtel Ltd. (Mumbai: BHARTIARTL) as the country's biggest player and be in a much stronger position to fight rivals in the hyper-competitive Indian market.

Media speculation suggests each company will have an equal stake in the merged entity, with Kumar Mangalam Birla, the chairman of Aditya Birla Group, Idea's parent company, likely to head up the new-look operator. (See What Does Vodafone-Idea Merger Mean for India's Telecom Industry? )

With around 390 million customers, the tie-up will have a market share of more than 50%. "The merger could improve the combined EBITDA margin by 250 basis points to 350 basis points due to cost savings -- mainly on network and marketing expenses," said a recent note from Fitch, a ratings agency, on the possible merger. "The combined entity will also have a more balanced subscriber mix, as Vodafone is strong in urban areas whereas Idea focuses more on the rural mass market. We estimate the merger would create an entity with… revenue of $11 billion to $12bn, and an EBITDA margin of about 28-30%."

A merger would be one of several triggered by the market entry of Reliance Jio last September. Offering low-cost voice and data services to Indian consumers, Jio has quickly racked up 100 million subscribers and put enormous pressure on longer-established operators. Reliance Communications Ltd. , India's fifth-biggest operator, recently acquired MTS and Aircel Ltd. , while Airtel bought Augere Wireless, Telenor India and Videocon Telecommunications Ltd. .

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Idea, in particular, has already been hit hard by Jio's market entry, recording a loss of 4.79 billion Indian rupees ($72.3 million) in the quarter ending December 31 2016, down from a profit of INR6.61 million ($99 milliion) in the year-earlier period. Vodafone India, meanwhile, lost 4.6 million data connections in the last three months of 2016, leaving it with 65 million subscribers altogether.

Even so, some big concerns surround the merger. It will incur a huge debt of INR890 billion ($13.4 billion) and could also encounter regulatory opposition. If nothing else, authorities will probably force it to return spectrum in five circles (service areas), as it would otherwise own more than half of the spectrum in certain bands in those areas.

— Gagandeep Kaur, contributing editor, special to Light Reading

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