Bhupesh Bhandari: Quite an Idea, Sirji

The proposed merger between Vodafone and Idea didn't catch people by surprise

The proposed merger between Vodafone and Idea Cellular didn’t catch people by surprise. A lot of commentators, much before the two companies admitted on January 30 that they were indeed in talks, had started to say how such a merger makes sense. You could call it the Reliance Jio effect.

In a scenario where the newcomer had made voice calls free and waived off all data bills for six months, incumbent networks had come under great stress. Combined with the high cost of spectrum, this had made a shakeout imminent. 

From almost a dozen players at the peak, there were just three large players left in the market: Bharti Airtel, Vodafone and Idea. Reliance Jio’s aggressive entry in September was bound to make the list shorter.

Airtel was the clear leader but it was not possible for either Vodafone or Idea to join hands with it. There is a rule that a single player in any circle cannot have more than 50 per cent share of the revenue or 50 per cent of the spectrum in a band. A merger with Airtel, of either Vodafone or Idea, would have breached these caps by a huge margin in all the 22 circles. That left the second- and third-largest players with only one option to counter the Reliance Jio onslaught: Merge their operations. 

If the merger goes through, the combined entity will breach the caps in some circles, to rectify which it will either have to offload subscribers or spectrum. But nobody expects that to be a deal breaker.

Vodafone has not made money in India so far. Last year, it wrote off  5 billion euros. As the business demands more and more capital infusion, its British parent had become weary and was pushing the Indian company to list on the stock market and raise money on its own. But given the competitive intensity, reflected in the steady fall in telecom stocks over the last one year, listing was not easy. A merger with Idea, which is traded on the stock market, allows Vodafone to access the stock market without going through an initial public offer.

The stress on Idea’s balance sheet was apparent. Its debt burden was on the rise — over Rs 41,500 crore on last count —  which had cast a shadow on its rating. Its share price was in decline. Joining hands with Vodafone will give it some breathing space. 

The synergies between the two are significant. While Vodafone is strong in urban markets, Idea has a sizeable presence in the rural markets. The combined entity will offer 3G and 4G services across the country. It will have to give up some spectrum in the crucial 900 MHz band, and also in 1800 MHz, yet its footprint in 17 circles, which account for 90 per cent of the industry’s revenue, will remain strong. It will save on network operating costs, which account for almost a fourth of revenues, as well as capital expenditure. 

It will be interesting to watch which of the two brands will survive and which one will pass into oblivion once the merger happens. Both Vodafone and Idea have invested heavily in their brand and have created a definite buzz around them. 

One news report suggests it could be Vodafone, simply because Vodafone may hold a higher stake than Idea.

If that happens, another iconic desi brand will be lost. Actually, it may not be such a big deal: Telecom brands fade away quickly. India has seen at least a dozen powerful telecom brands get quietly extinguished once they got acquired by others. Telecom brands may be a mile wide, but they are just an inch deep.

Vodafone and Idea together will have 42 per cent market share, which is way above current market leader Airtel’s 31 per cent share. After a long reign at the top, Airtel will be dethroned. No acquisition of another network will catapult it to the top again. Anyway, its books too are stressed with high debt.

Still, the Airtel scrip went up smartly the day Vodafone and Idea announced that they were exploring the possibility of a merger —investors were relieved that competition will lessen, which will leave a positive impact on Airtel.

It will be interesting to see how Reliance Jio will react to it. Some commentators had expected it to overtake Vodafone by 2020 to become the second biggest player after Airtel. Once the Vodafone-Idea merger happens, Reliance Jio will take much longer to become number two. Will this be to Mukesh Ambani’s liking? One brokerage house has called it the biggest risk to the Vodafone-Idea deal. “Might Reliance Jio find a way to encourage regulators to reject the merger on anti-competitive grounds? In the murky world of Indian politics, we think this line of action remains a possibility,” it adds.