On Monday, 20th march, Idea Cellular announced that the board has approved its merger with Britain’s Vodafone India Limited (VIL) and its subsidiary Vodafone Mobile Services Limited (VMSL) with itself. The owner of Idea Cellular Mr. Kumar Mangalam Birla said that its Board has approved a merger with Vodafone India and VMSL, which will create India’s largest telecommunication company with about 400 million customers with 35% customer market share .and the revenue market share will be 41%. In a statement Kumar Mangalam Birla said, Vodafone will own 45% in the combined entity after transferring 5% to the Idea promoters of for Rs 38 thousand crores in cash post the merger. Kumar Mangalam and other Idea promoters will hold 26 percent and the remaining will be owned by the public.
It comes after facing the turmoil with the launch of Reliance Jio Infocomm last year. Last year, the new 4G mobile broadband network of Reliance Jio built at a cost of more than $20 billion by Mukesh Ambani, India’s richest businessman.
Reliance Jio has made a huge impact on Bharti Airtel, Vodafone and Idea, with free voice calls and low-price data services. Idea Cellular said the companies are expecting their cost and CAPEX synergies of about $10 billion in Net Present Value (NPV) after integration costs and spectrum payments. As per India Ratings, the merged entity will reduce the operational cost through eliminating the duplication of spectrum and infrastructure CAPEX. According to a Fitch Rating report, both the companies are also expecting to improve the combined net earnings due to cost savings on marketing and network expenses.
Nitin Soni of Fitch Ratings believes that the combined Ebitda margin could improve by 250 to 300 basis points as the two companies will save some expenses for network sharing. Idea Cellular said that it will issue equity shares to Vodafone India after the scheme of amalgamation with Vodafone Mobile Services Limited (VMSL), which will be equal to 47 % of the paid-up capital of the company on a diluted basis.
Prior to transaction completion, Vodafone India and Idea Cellular intend to sell their standalone tower assets and Idea’s 11.15% stake in Indus Towers to reduce the leverage in the amalgamation. Vodafone India will also explore strategic business options for its 42 percent stake in Indus Towers; potential options include a partial or full disposal.
Although the consolidation will fight the price war for a year or two-year, in long-term prices are going to increase. With less number of companies in the telecom sector or in any sector, there is a higher chance of consensus on prices. We all are expecting better service quality and customer experience due to this Vodafone-Idea amalgamation in the telecom sector, which will lead to pooling of vital resources and infrastructure. A combined entity in the sector will also reduce the financial challenges, which will encourage them to spend more money on quality of services.
