A possible marriage between Vodafone Plc and Idea Cellular may not solve a lot of their problems but will be a game-changer for the telecom sector, which is grappling with intense competition that has pulled down revenues and profits of all the players.
Ashish Sharma, partner, PwC India, said the coming together of the two telecom service providers will lead cost savings.
“I am not very sure whether it (merger) will solve a lot of the problems the two groups face but you will see significant cost saving and you will see them being in significant positions of strength in number circles like Gujarat, UP (West), MP, Maharashtra, Mumbai and Delhi,” he said.
If the deal clears all regulatory hurdles then the Voda-Idea combine would surge ahead of the current market leader Bharti Airtel in terms of both revenue and consumer market shares of 43% and 40% respectively compared to the latter’s 33% and 26%.
Sharma also feels that the latest M&A in the telecom sector could make it challenging for Rel Jio to reach its 100-million target soon and could see the Mukesh Ambani-owned telecom company extending its freebies for data services beyond the current expiry date of March 31.
Reliance Jio is said to have 13% market share. Other players include Tata Tele (7%), BSNL-MTNL (6%), Aircel (5%) and RCom (3%). Close to 3% of market share is held by smaller players like Telenor and others.
It is not known what will be the valuation of shares that would be allotted by listed Idea Cellular to Vodafone Plc, shareholding pattern of combined entity and who would have the management control in it.
Sharma said, “If you just take the ratio of the future cash flows, the economics should favour existing shareholders of Vodafone than those of Idea. Also, given that Idea has multiple shareholdings, the picture will become more competitive”.
According to him, just by “bare reading of the fact” it seemed that Vodafone will become the majority shareholder or the single largest shareholder in the Voda-Idea combine.
“What’s going to happen is Idea will buy out Vodafone’s operation in India from Vodafone Plc and issue shares in return. It would be interesting to see what the management and effective control looks like in the combined entity,” said Sharma.
Most analysts feel that the consolidation may not be completely in line with the M&A guidelines notified by the government in terms of spectrum and market share caps.
Sharma said the merger is sure to come under the Competition Commission of India’s (CCI) scanner; “They (Voda-Idea) will breach the cap in many (telecom) circles and will have significant issues with the M&A guidelines both on the spectrum and market share sides. They will be required to commit to sell down or scale down spectrum and market share in quite a few circles”.
A quick analysis showed that in circles like Gujarat, UP (west), Madhya Pradesh (MP), Maharashtra, Mumbai and Delhi, the two players together had significant spectrum and market share.
One of the positive outcomes of the merger would be that it would improve the combined entity’s ability to fund its capital requirement than what the two players have today.
Also, it was in the interest of the government to see the merger go through because the sector will benefit with the emergence of a stronger player.
Telecom experts believe there were too many players in the market today and none of them is viable other than Bharti Airtel.
“It is in government’s interest if it wants to foster strong and sustainable structure to allow for consolidation. I’d be surprised if the government comes back and says no. Of course, there will be a lot of sale of spectrum and scaling down of consumer market share (CMS) to meet the M&A guidelines,” said an analyst.
Some time back, Aircel and Reliance Communication (RCom) also announced a merger while Bharti Airtel was said to be eyeing Telenor, whose debt on the books far exceeds its value making it not an attractive acquisition target.
Sharma said Idea was marginally better than Telenor as it is an unviable player because its cash flows were not capable of sustaining its current business.