Vodafone-Idea merger delay to mount debt, market losses

The delay in the merger between Vodafone India and Idea Cellular not only diminishes the savings that the two hoped to achieve, but also worsens the share losses in a hyper competitive market place. 

The proposed entity was expected to save Rs 140 billion from the fourth year of operations, with the net present value of operating and capital expenditures pegged at $10.5 billion.

In fact, the delay owing to spectrum charges will only aggravate the twin concerns the street had on the Vodafone-Idea merger — uncertainty about the merger and the timing of the market recovery.

One area that could impact the proposed entity due to the delay, both on the merger and savings, is the high debt. The combined entity has a debt of just under $17 billion and is highly leveraged with a net debt to operating profit at over eight times.

The tariff war is making the situation worse. Manish Adukia and Piyush Mubayi of Goldman Sachs said that lower tariffs could put even more pressure on players with stretched balance sheets.

They indicate that while Bharti and Jio continue to have fairly robust balance sheets and could sustain lower tariffs for a few more quarters, it will be tough for Idea and Vodafone India, as they had a net debt to operating profit exceeding eight times the March quarter. The uncertainty of the merger raises doubts about the savings, as the company can achieve, given the rapid decline in revenue and market share. 

Ambit Capital, in an earlier report, had indicated that with a rapid decline in revenues and operating profit (Idea’s FY18 revenue and operating profit down 20-40 per cent) in a materially adverse operating environment (due to Jio), the synergy guidance has limited meaning. The firm believes that the company will have to cut its savings guidance, given the deteriorating market conditions since the announcement.

Both Idea and Vodafone are being pegged back on the revenue as well as market share fronts and the delayed launches of 4G. Even though their combined subscriber market share is 36 per cent for FY18, net data additions is only 11 per cent.

The number for Bharti Airtel and Reliance Jio is 24 per cent and 65 per cent, respectively. 

Rumit Dugar and Aniket Pande of IDFC Securities said that the Idea-Vodafone has been unable to capture the shift in data market due to their low net data subscriber addition. 

For the entity increasing their share of data net adds will be a challenge as the focus will be divided between delivering cost-centric merger synergies and fending off competition from Bharti/Jio, they added. On the revenue market share front, while other operators gained from the exit of smaller players, Idea Cellular loss revenue market share (RMS) to the tune of 30 basis points with RMS loss in 14 of 22 circles, including in key markets of Madhya Pradesh, UP (West) and Maharashtra.

As far as the street is concerned, the near term impact of the merger delay will be on the Idea Cellular stock, which has shed 41 per cent from the start of the year. The pressure on the stock could continue, given that there is no clarity on the merger and the pricing scenario.