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After telecom majors Idea Cellular and Vodafone India Ltd. (VIL) announced the acceptance of their merger, credit rating body ICRA believes that this consolidation will be positive for the industry, as it would restore some pricing power and give better bargaining terms with vendors and suppliers.
Keeping the intensity of competition intact in the telecom industry, the merged telco will benefit from operational synergies which will allow it to curtail some expenses such as co-location rentals and energy costs, customer acquisitions and support teams and reduced expense on branding and advertising. This should translate into profitability uplift to the merged entity, although the same will take some time to materialise, ICRA said.
"Vodafone-Idea would be the India's largest telecom operator not only in terms of subscriber base, but also in terms of revenues as well as spectrum holding. Vodafone is the market leader in Metro circles (combined), while Idea is a strong player in category B circles, thus the merged telco would have a strong footprint, with market leadership in 12 out of the 22 circles, and 2nd rank in nine circles," said Harsh Jagnani, VP- Sector Head, ICRA Ltd.
The merger will facilitate VIL and VMSL's (Vodafone Mobile Services Ltd.) entire business to be vest in the company, excluding VIL's 42 percent share in Indus Towers. The merger will come into effect after new shares are issued in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India.
However, Jagnani claimed that the transaction faces many challenges and would take almost a year to conclude.
"The merged telco would breach the spectrum holding cap in five circles in 900 MHz band and in two circles in the 2500 MHz band; and likely to breach the revenue market share cap of 50 percent in six circles. These would have to be resolved in a fixed time frame. Further, the debt levels of the merged telco would be high at around Rs. 108,000 crore, which translates into a debt/EBITDA of approximately 4.4x. Both the entities would have to inorganically deleverage to rein in the debt," he added.
Meanwhile, the telecom biggies on Monday after their merger announced Kumar Mangalam Birla as the Chairman of the new entity.
The two parties believe that the merger will enhance pan India 3G/4G footprint, thereby accelerating the Narendra Modi-Government's 'Digital India' initiative. Furthermore, it is believed to help in leveraging customer affinity towards the two brands in the telecom spectrum.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)