The merger between Vodafone India and Idea Cellular, to be called Vodafone Idea Limited, will soon start functioning as India's largest operator, with the Department of Telecommunications (DoT) giving the final go-ahead to the deal.

The merger had been held up on account of a pending payment to the DoT. But this was settled last month when Vodafone India and Idea Cellular Ltd. paid 72 billion Indian rupees ($1.04 billion) in the required spectrum payments.

The merger was triggered by the arrival of aggressive new competition in the country. Owned by Mukesh Ambani, India's richest man, Reliance Jio launched a range of free and heavily discounted services in September 2016, forcing incumbents to slash prices and hammering industry profitability.

The knock-on effect was a wave of consolidation. As the biggest deal of all, the merger between Vodafone and Idea will dethrone Bharti Airtel Ltd. (Mumbai: BHARTIARTL) as India's biggest telco. With around 408 million customers, it will also be the second-largest service provider in the world.

That sort of scale should help Vodafone and Idea to fight competition, and overlapping operations promise a reduction in costs and fatter margins in future.

Restoring profitability is a priority. Idea Cellular reported a loss of INR28.1 billion ($410 million) in the June quarter, compared with a profit of INR6 billion ($87.3 million) two years earlier, just before RJio entered the market. RJio stands out as the only Indian operator to report a profit in the recent quarter.

Vodafone and Idea have their sights set on annual savings of INR84 billion ($1.22 billion) by the fourth year of operations. But this will not be easy. Besides integrating their networks and billing systems, the operators might need to renegotiate some of the existing contracts with vendors, including for towers and IT infrastructure. Under infrastructure sharing and roaming arrangements, they already share 66,000 sites. The new-look player will also have to invest significantly in upgrading its networks to cope with challenge from RJio.

"The key focus area for the merged team will be to fast forward the substantial cost synergies with an estimated NPV [net present value] of around $10 billion and rapidly expand the broadband coverage and capacity by redeployment of overlapping equipment and re-farming/consolidation of spectrum," said Idea in its recent first-quarter report.

Another concern is a shift in the battleground toward the home broadband and business segment. RJio is due to launch a home broadband service and has already introduced one for business customers. Vodafone does have a strong presence in the business market, and can learn from its international operations, where it is focused on the Internet of Things (IoT). But neither Vodafone nor Idea has much of a presence in the home broadband segment.

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The merged entity might also encounter cultural problems. Vodafone is part of a global telecom group and is known to pay more and offer better working arrangements than Idea. Ensuring the new company has a single culture could be a time-consuming and costly process.

To slash costs, the companies are likely to make cuts in marketing and advertising. But employees throughout the organizations will lose their jobs because of overlapping functions or a lack of fit with the new strategy. India's telecom industry is already reeling from job losses and the Vodafone-Idea merger is bound to make the situation a lot worse.

Idea's first-quarter report, however, paints a hopeful picture that industry ARPU (average revenue per user) will revive in the future. "While near-term challenges persist, long-term opportunities in the mobile sector continue to remain attractive," it says. "With the exit of subscale operators, consolidation of Industry structure is nearly complete." Idea goes on to say that bundled offerings, service take-up in rural areas and SIM consolidation could all boost spending in the quarters ahead.

Vodafone Idea's immediate challenge is to weather the RJio storm so that it is eventually in a position to benefit.

— Gagandeep Kaur, contributing editor, special to Light Reading