Vodafone-Idea: Will India's biggest telecom M&A disrupt Jio, the disrupter?

Vodafone in India faces a classic disrupter problem

Serving 400 million customers in a single market would seem an enviable position for any business. Vodafone’s $23.2 billion Indian merger will accomplish as much. The timing, however, looks potentially unfortunate.

Mobile markets everywhere have been rocked by cheap upstarts, including T-Mobile in the U.S., Iliad in France and Hong Kong group CK Hutchison’s Three unit in other European markets. But in India Reliance Industries has played the disrupter role with particular ferocity, launching a completely free service last September that has already amassed more than 100 million customers.

Vodafone, the number two player in the market, made a €5 billion write-down against its Indian unit in its November half-year results. Now the London-listed company has a strategic response: a merger with number-three operator Idea to create a market leader with a 35% market share of subscribers.

This puts Vodafone India and Idea—a locally listed company part-owned by the Birla family—in a strong position to cut costs and thus compete effectively with Reliance. Savings from the deal are estimated at a punchy $2.1 billion, on a combined revenue base of $12.2 billion.

So far so good. But the other feature of the deal is that it gives Vodafone a way out of India. The agreement with Idea already involves Vodafone selling a roughly 5% stake in the merged business to the Birla family, with further stake sales planned.

This transfer of value could end up looking badly timed. Reliance starts to charge for its services next month, which could bring greater discipline to the market. Vodafone may have chosen the point of maximum competitive chaos to beat a retreat.

Stephen Wilmot contributed to this article.

(Source: The Wall Street Journal)