Idea stock up 2.7% on Vodafone merger buzz

CLSA study notes the new entity would be the largest in the segment

The Idea Cellular stock jumped 2.7 per cent on Thursday, following a report by CLSA, the brokerage and investment group, on a potential merger with Vodafone India.

This also revives worry of further battles in the telecom segment, which has seen turmoil after Reliance Jio’s aggressive launch last September. There has been a buzz for a while that Vodafone India is looking for a merger with another company. CLSA says its analysis of a potential merger with Idea suggests such a deal would change the industry order. 

The main points it has made are:

• Given the complementary operational strengths of the two entities, Idea Cellular would be the best fit for Vodafone India if the two are to be merged. The merger will help Vodafone avoid the trouble of going through an Initial Public Offer of equity and allow back-door listing of its business; 

• The main attraction of such a merger is the scale of the combined entity. More so with R-Jio's entry. The merged entity would have a 43 per cent revenue market share, well ahead of Bharti Airtel’s 33 per cent and R-Jio’s estimated share in FY19 of 19 per cent, it estimates. The combined entity will have the highest third-generation technology (3G) spectrum among all operators and the highest in 4G in the 1,800 MHz band;

• Other brokerages, too, have made some points in the recent past on the potential merger. The merged entity, according to analysts at Citi Research, will be among the top two in 20 of the 22 telecom circles. Important, as most high Arpu (average revenue per user) customers tend to be with the top two operators. Revenues of the entity would be at least 1.5 times that of Bharti Airtel and 1.25 times its operating profit;

• The entity’s operating profit is expected to improve by 25-30 per cent, led by savings in network and administration costs, and a ratio of net debt to operating earnings of a manageable 3.3; 

The merger, however, will not be without regulatory hurdles. The rules mandate that subscriber and revenue market shares have to be below the 50 per cent mark in such cases, while spectrum holdings have to be below specified caps. Analysts say in five of the 22 circles the norms will get breached if such a merger is initiated. The combined entity will also have a bigger stake (53 per cent) in Indus Towers than Bharti (42 per cent). Indus is a three-way JV between Idea, Bharti and Vodafone. Idea will then have to part with its stake to the new majority owner and that might not be acceptable to Airtel. 

Bharti Infratel will be a loser, as tower rationalisation (given common towers between Idea and Vodafone) means Indus will lose 14,000 tenancies and Infratel 4,000 tenancies.