The merger between Vodafone India and Idea Cellular is likely to pose challenges to both Reliance Jio and Bharti Airtel.
Price war
The proposed merger is the result of the price war in the Indian telecom market.
The price war has forced some telecom operators to report losses, post drop in revenue growth and loss Internet users in the recent quarter.
Six months ago –in September 2016, Reliance Jio, an all-India 4G operator promoted by billionaire Mukesh Ambani, started offering free voice and data services to all Indians who have got a 4G smartphone.
Reliance Jio has now got more than 100 million subscribers on its 4G network despite complaints about poor quality voice service. For comparison, Airtel, the number telecom operator, has 270 million users on its 2G, 3G and 4G network.
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The free package from Reliance Jio will end in 3-4 days.
From April, Reliance Jio will be charging Rs 303 for month offering free calls, no roaming charge and 30 GB data to its Prime Members for one year.
Rivals of Jio tried to match the new offer from Jio.
Bharti Airtel is offering unlimited Airtel to Airtel voice and 300 MB per month for Rs 146 and unlimited calls and 1 GB data per day for Rs 349.
Idea Cellular is offering unlimited Idea to Idea voice and 300 MB per month for Rs 148 and unlimited calls and 1 GB per day for Rs 348. Data is split equally between day and night time (11pm-6am).
Vodafone India is offering unlimited Vodafone to Vodafone voice and 300 MB per month for Rs 146 and unlimited calls and 20 GB per month for Rs 345.
Jio says its offer will be 20 percent improvement to any rival offer. This means, all operators will be challenged.
Benefits to Idea-Vodafone
Idea-Vodafone entity will be the largest telecom operator with 400 million customers, 35 percent customer market share and 41 percent revenue market share. Idea-Vodafone will replace Airtel from the number one position. India has more than 1 billion phone subscribers, according to telecom regulator TRAI. This includes owners of double SIM cards as well.
Idea-Vodafone has reported $12.18 billion revenue in the last 12 months. Its Capex was $2.29 billion in the last 12 months. Bharti Airtel’s consolidated Capex was $866 million and India Capex was INR 53714 million in Q3 alone.
In terms of 4G coverage, the new company will not be able to compete with Reliance Jio and Airtel in the short-run because Idea-Vodafone has 4G presence in 17 circles. Both Jio and Airtel have 4G presence in all 22 circles. But Vodafone and Idea want to enhance their market share in the Indian mobile Internet market.
The Indian telecom industry is not considering both Vodafone and Idea Cellular as aggressive as Reliance Jio and Bharti Airtel in the price sensitive market. Reliance Jio is unlikely to announce any new tariff shortly because there are no indications from Idea and Vodafone about any further price cut. Bharti Airtel is likely to announce new pricing strategy soon.
There will be 4 big operators in India. Bharti Airtel, Reliance Jio, Idea-Vodafone, Reliance-Aircel combine and BSNL-MTNL combine. India is looking forward for some action from Airtel, which can take on Reliance Jio.
Benefits to Vodafone
The $23.2 billion merger deal, the largest in the India telecom market, will result into Capex savings of $2.1 billion in 4th year post-closure.
Fitch Ratings, On February 1, 2017, said the merger should help withstand intense price competition in the Indian telecom market, but is unlikely to lead to increased pricing power for operators in the short term.
The merger could improve the combined EBITDA margin by 250bp-350bp due to cost savings – mainly on network and marketing expenses. The combined entity will have a balanced subscriber mix, as Vodafone is strong in urban areas whereas Idea focuses more on the rural mass market.
Fitch estimates the merger would create an entity with an EBITDA margin of about 28 percent – 30 percent and revenue of $11 billion – $12 billion. Bharti Airtel’s consolidated EBITDA margin was 36.7 percent in Q3 fiscal 2017.
Vodafone, which will own 45.1 percent of the combined company after transferring 4.9 percent stake to the Aditya Birla Group for $579 million in cash, will be the single largest shareholder.
Aditya Birla Group will have 26 percent of the combined company, while Idea’s other shareholders will have the remaining 28.9 percent. Aditya Birla Group has the right to acquire up to 9.5 percent additional stake from Vodafone.
Vodafone Group’s net debt will be reduced by approximately $8.2 billion lowering Vodafone Group leverage by around 0.3x Net Debt/EBITDA4. Airtel’s consolidated net debt has increased to $14,339 million in Q3 fiscal 2017 from $12,232 million in the previous quarter.
The combined company will hold 1,850 MHz including 1,645 MHz of liberalised spectrum acquired through spectrum auctions.
Challenges
There will be job cuts due to consolidation. The combined entity needs to finalize one CEO for running the business. They need to choose between Vodafone India CEO Sunil Sood and Idea Cellular CEO Himanshu Kapania.
Fitch Ratings said the entity would have more spectrum than regulations allow in five circles – this excess spectrum would need to be sold or surrendered to the government. The new entity may have to cede some revenue market share in six circles, where pro forma revenue market share would be higher than the 50 percent allowed by regulation.
The merger will not bring any substantial benefit to Indian wireless consumers. Rather, the merger will impact IT and technology vendors and employees. Idea and Vodafone already indicated about optimization of telecom infrastructure and IT systems.
Since Vodafone Group has strong financial muscle — especially after selling stake in Verizon Wireless, the merged entity will be in a better position to take on Bharti Airtel and Reliance Jio.
Baburajan K
editor@telecomlead.com
