It's official: Idea, Vodafone are merging to create India's biggest telco

After eight months of hectic parleys, Britain's Vodafone Group's Indian subsidiary and Aditya Birla Group's Idea Cellular have taken a step closer to a mega merger that would create a new market leader better able to contest a brutal price war with 42 per cent market share.

Idea Cellular on Monday approved the merger with Vodafone and Vodafone Mobile Services Limited.

In a BSE filing, Idea Celluar announced its approval of amalgamation of Vodafone India Ltd (VIL) and its wholly owned subsidiary Vodafone Mobile Services Limited (VMSL) with the company subject to receipt of necessary approvals of shareholders, creditors, SEBI, RBI and other governmental authorities.

Idea Cellular gained nearly 15% in first 5 minutes of the trade but later pared some gains to trade 6% higher after media reports that the company has approved merger with Vodafone India. According to reports, Idea Cellular will hold 25% stake in the merged company.

According to the release, the Idea Board  believes the proposed amalgamation will result in:

a. Creation of largest Indian telecom operator with widest mobile network in the country and pan India 3G/4G footprint

b. Sufficient spectrum to complete with major operators in the market while offering innovative priced mobile services to customers;

c. Acceleration of expansion of wireless broadband networks

Accordingly, Vodafone will hold 45.1 per cent stake and will transfer 4.9 per cent stake to Idea founders. The merger plan with Vodafone will require regulatory approval.

Vodafone, the world's second-largest cellphone networks operator, has agreed to Birla's demand that Kumar Mangalam Birla would become the chairman of the merged entity. The equity value of both the companies has been estimated at Rs 40,000 crore each while the combined entity would have debt of approximately Rs 89,000 crore.

The merger was necessitated by the launch of Mukesh Ambani-owned Reliance Jio Infocomm that has shaken the Indian wireless telephony market with its low rates.

Jio has made an immediate impact with the launch of free calls and cut-price data, forcing the three biggest operators — Bharti Airtel, Vodafone and Idea — to slash prices and accept lower profits.

Since its launch in October last year, Jio had garnered 100 million customers, whereas Vodafone and Idea would have around 375 million customers.

The merger would be a win-win deal for both companies. While Vodafone will deconsolidate its massive India debt from its British parent, Idea Cellular would be able to invest in its operations without taking much help from its parent group. Vodafone will also get a listing in India as Idea is already listed in India.