Voda, Idea in merger talks; experts cite regulatory challenges

Britain's Vodafone Group today confirmed it is in discussion to merge its Indian unit with Idea Cellular in an all-share deal to create the country's largest telecom operator with 43 per cent revenue marketshare.
The combined entity will pose formidable competition to the current market leader Airtel and aggressive new entrant Reliance Jio.
However, the biggest hurdle to the merger will come in form of regulatory approvals and practical implementation challenges, warn industry experts who, among other issues, cite breach of revenue marketshare and spectrum caps in five of the 22 telecom circles.
That said, the merger of Vodafone -- the country's second-largest cellphone network operator -- with the Aditya Birla Group firm -- India's third-largest cellular operator would create a company with over 395 million users and form one of the largest telecom companies in the world.

In a statement, the UK-based company said it is in talks with Idea about an all-share merger, but the deal under consideration excludes its 42 per cent holding in Indus Towers, a joint venture with Bharti and Idea.
"Any merger would be effected through the issue of new shares in Idea to Vodafone and would result in Vodafone de-consolidating Vodafone India," it said adding, "there is no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction."

Since its entry in India in 2007, Vodafone has become number two operator in the country, but its journey has been tumultuous as it is locked in a legal battle with the government over a USD 2 billion retrospective tax claim over its acquisition of Vodafone India from Hutchison in 2007.

It had written down value of business by 5 billion euro, late last year. The British firm has pumped in more than USD 7 billion into the India unit.
While Bharti Airtel is the largest mobile operator today with 265.8 million subscribers, Vodafone has 204.6 million users and Idea Cellular 190.5 million users.
"...The merger would result in combined entity facing practical implementation issues, the most significant of them could be the cost associated with liberalising the spectrum (estimated at Rs 2,000-3,000 crore - an expense which would go to the Government without any benefit to a combined entity). The combined entity would also breach spectrum caps in 5 circles, the market value of which comes to Rs 7,500 crore," Bank of America-Merrill Lynch said.

Citing challenges related to regulatory approvals, spectrum sale and stake in tower business Indus, CLSA had earlier this month noted that India's telecom merger and acquisition norms require the combined entities revenue and subscriber marketshares to be below 50 per cent and spectrum holdings to be below specified caps.
"Our analysis reveals the Vodafone-Idea combined entity would hit revenue marketshare, subscriber market share and spectrum caps in five of the 22 circles," CLSA had said.