Last month, Vodafone confirmed that it was in talks with Idea Cellular about a possible merger of their Indian operations. Such a tie-up between India's second- and third-biggest operators would have huge ramifications for the industry. (See Vodafone in Merger Talks With India's Idea Cellular.)
For one thing, the merged entity would dethrone Bharti Airtel Ltd. (Mumbai: BHARTIARTL) as India's largest service provider on the basis of subscribers and revenues. Should the deal go through, the combined entity would have more than 395.21 million customers, giving it nearly 50% of the entire market.
While Vodafone India is known to have focused on urban areas and high-net-worth individuals, Idea is strong in the rural segment of the market. The new-look business would therefore have a much broader customer base. Moreover, Vodafone also has a strong presence in the enterprise space, in which Idea Cellular Ltd. remains relatively weak. Neither player, meanwhile, has made any real inroads into the digital TV space.
A beefed-up operator would be far better placed to fight the Reliance Jio new entrant that has caused mayhem in the Indian market by offering free voice and data services. It will have enough spectrum to improve the data services it offers to customers. In addition, the duplication of network assets across much of the country should create opportunities for cost savings in future. The combined entity will also gain bargaining power with suppliers.
Analysts are upbeat on the potential for efficiency improvements. "We believe the merger would also create significant opportunities for capex savings by eliminating duplicate network investments and avoiding future spectrum auctions, given the combined entity should have sufficient spectrum portfolio to expand 3G/4G services across 22 Indian regional markets -- or 'circles'," says a note issued by Fitch Ratings Ltd. on the proposed tie-up.
The merged player should also present a stronger challenge to Airtel, which has been rapidly expanding its 4G networks and now offers services in 21 circles. Having procured spectrum in 2015, both Vodafone and Idea have been late to the 4G game. Vodafone has now launched 4G services in 17 circles and is targeting availability in 2,400 towns by March 2017, while Idea offers services in ten circles and is aiming for 17 by the same date.
Unfortunately, consolidation is unlikely to relieve much of the pricing pressure caused by Reliance Jio. In all likelihood, service providers will struggle to increase their tariffs for some time yet. "Consolidation is natural in an industry suffering from too many operators and a focus on price competition, and should benefit the industry in the long term," says Fitch in its note. "However, the recent entry of Reliance Jio is likely to ensure that price competition will remain very high for at least one to two years."
There are also some regulatory concerns. Merger and acquisition rules in India prevent a company from owning more than 50% of spectrum in any single band in a given circle. This means that Vodafone/Idea may be require to surrender spectrum in five circles.
"The combined entity would have more spectrum than regulations allow in five circles -- this excess spectrum would need to be sold or surrendered to the government," says Fitch. "The new entity may also have to cede some revenue market share in six circles, where pro forma revenue market share would be higher than the 50% allowed by regulation."
Another complication may be the Indus Towers joint venture between Airtel, Vodafone and Idea. Airtel and Vodafone each own a 42% stake in the infrastructure business, with Idea holding the remaining 16%. A merger between Vodafone and Idea would turn Airtel into a junior partner, to its probable discomfort. Some reworking of the arrangements may be necessary.
— Gagandeep Kaur, contributing editor, special to Light Reading