Following days of media speculation, Vodafone India, the country's second-largest service provider, today confirmed it is in talks with Idea Cellular, the number-three player, regarding a possible merger.
Should it come off, such a tie-up would create a new mobile giant in India and represent the biggest M&A transaction the country has seen in years.
"Vodafone confirms that it is in discussions with the Aditya Birla Group about an all share merger of Vodafone India (excluding Vodafone's 42% stake in Indus Towers) and Idea," said Vodafone in a statement issued earlier today. "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."
The merged entity would easily be India's largest telco by customer numbers. Bharti Airtel Ltd. (Mumbai: BHARTIARTL), the current market leader, today serves about 33% of the market, while Vodafone India and Idea Cellular Ltd. serve 23% and 19% respectively. Together they would push Airtel into a relatively distant second place.
Following confirmation of talks, shares in Vodafone Group plc (NYSE: VOD) were trading up 2.9% on the London Stock Exchange at the time of publication.
"Consolidation seen during 2015/16 was expected to continue in 2017, so if this happens it would not be surprising," said Amresh Nandan, a research director at Gartner Inc. , in a statement. "Both Vodafone India and Idea have to figure out their long term business strategy and a merger could well be the path, given current industry competitiveness and dynamics.
"If they decide to do so, one can hope for a long term strategy behind it and not just gaining market share and subscriber share," added Nandan. "It would be very important for the merging entities to realize the transformation required in their operations. At this point in time in the communication industry, transforming themselves while they consolidate will be a necessary step, even though not an easy one."
India's telecom market appears to be in the throes of consolidation following several recent deals. Those have included takeovers of Sistema Shyam TeleServices Ltd. and Aircel Ltd. by Reliance Communications Ltd. , the number-four player, as well as Airtel's acquisition of Videocon Telecommunications Ltd. In addition, the industry has been abuzz about a potential merger between Airtel and the local subsidiary of Norway's Telenor Group (Nasdaq: TELN). And Tata Teleservices Ltd. is also said to be looking for a suitor.
Much of this activity has been triggered by the recent entry into the market of Reliance Jio, which has caused a ruckus by offering free voice services for life and free data services for a six-month period. Yet the low margins in India's telecom sector, combined with cut-throat levels of competition, always meant the market was ripe for consolidation.
Vodafone, meanwhile, has been contending with several challenges in India, including a long-running tax dispute with authorities. "Vodafone India has been anxious about the very obvious closeness between Reliance Group [the owner of Reliance Communications] and the Indian Government," added an industry insider who wanted to remain anonymous. "Further, the tax issue has become a means to arm twist the company, whenever the government so deems fit. Vodafone didn't go ahead with its plans for an IPO for the same reason."
Vodafone and Idea Cellular could make ideal partners. While Vodafone India has s strong subscriber base in the enterprise segment, and among high-net-worth individuals, Idea Cellular has emerged as a strong player in rural communities. The merged entity might, however need to surrender spectrum in a few circles (service areas) in keeping with the merger and acquisition norms.
— Gagandeep Kaur, contributing editor, Light Reading