Reliance Jio made a foray in September 2016, just to upset the existing operators in the industry like especially the incumbents (Airtel Idea Vodafone). This led to a huge wave of consolidation in the industry between the likes of Reliance MTS and Aircel, Telenor being absorbed by Airtel; Videocon exited the business reducing the number of players to mere 3 or 4. This consolidation is to negate the “rock-bottom pricing” with aggressive investments from Jio who has very deep pockets. The consolidation of Idea – Vodafone is a final consolidation of big players in the Indian telecom industry to sustain in the business with superior network and customer service correlating with low prices. This post deals with the Idea – Vodafone consolidation and the finer details of the entire deal.
Some basic information before speaking about Idea Vodafone merger
Idea was initially started with three partners, namely Aditya Birla Group, Tata Group and US-based AT&T in 1995. The other two partners exited the company and Aditya Birla Group remained the lone principal investor in Idea. With the acquisition of Spice in 2008, it consolidated its position in rural areas in many states in India, improving its footprint in India. The operator boasts a subscriber base of 190 million, ranked 3rd in India.
Vodafone made a foray in India in 2007 by acquiring existing businesses from Hutch Telecom which was operational since 1992 in India. Hutch went on to expand its footprint in urban areas, acquired BPL mobile in 2003 and Essar Spacetel in 2006. In 2011, Vodafone acquired stake in Essar group (74%) consolidating its stake in the Indian subsidiary. The operator boasts a subscriber base of 204 million, ranked 2rd in India.
Here comes King-Kong in the market – Jio who disrupted the silent telecom industry
The telecom industry attained certain stability after 2008 2G auctions. Voice was the king and the price for calls reduced drastically. Companies couldn’t sustain and incumbent operators had their way. They lacked one thing – Deep pockets. That wasn’t the case with Jio. Reliance Jio had been one of the most anticipated operators before it made foray in the Indian telecom industry in September 2016. No one expected it to give free services since its inception to all subscribers till March 2017. The incumbents tried various ways to retain their customers, but all foiled by the massive run of Jio. It recently reached the 100 million mark recently in 2017. Airtel, Vodafone and Idea reported lower profits and losses for the first time in years in their quarterly profits. All operators wanted to secure their investments in the Indian telecom industry. The Norwegian Major Telenor group exited citing that high investments in India wouldn’t yield sufficient returns.
Idea Vodafone Merger salient points
Salient features of the Idea Vodafone Merger in March 2017
- Subscriber Base: – The new entity would have a subscriber base of 395 million users (35% market share) surpassing the industry leader Airtel which currently has 260 million users (23% market share).
- Spectrum Bank: – The new entity would have a spectrum bank of 728 MHz in 2G, 3G and 4G bands. The new entity still would have lesser spectrum compared to Airtel with 860 MHz, but ahead of Jio with 650 MHz. The best point to be noted here is that Jio only owns 4G spectrum, which is the future of Indian telecom industry as “data is the new oil”
- Value: – The Company after complete integration is expected to be worth Rs.210200 crore or Rs.2.1 lakh crore.
- Earnings before interest, tax, depreciation and amortization: – The new company is expected to have an EBIDTA of 33100 crore which is 40% of the company’s revenues.
- Revenue: – The entity (Idea Vodafone) is expected to have an annual revenue of 81600 crore (41% market share).
- Value/EBIDTA ratio: – The new entity would have an EBIDTA ratio of 6.35.
- Stake: – Vodafone Group would have a 45.1 % stake in the new firm with Rs.3900 crore in cash for a 4.9 % stake, which is transferred to Aditya Birla Group summing up to 26% and the rest is with the public investors and other investment firms in Idea.
- Top Posts: – Aditya Birla Group decides the Chairman of the new entity (Kumar Mangalam Birla) and Chief Financial Officer would be a nominee of Vodafone Group. Chief Executive Officer and Chief Operating Officer are selected by consulting both the partners.
Who gave what? What each company contributed to the Idea Vodafone merged entity.
|Subscriber Base||190 million||204 million|
|Spectrum||316 MHz||411 MHz|
|Rs.52700 crore||Rs.55200 crore|
|Revenue||Rs.36900 crore||Rs.44700 crore|
|Indus Towers||42% stake||11% stake|
Is this a merger between equals?
Don’t come to conclusions seeing the table above. They are just facts which don’t speak about the underlying benefits each entity gets.
- Tax problems are negated with the presence of an Indian partner who can take care of these issues. The Vodafone-Hutchison Whampoa case with Indian government took the Vodafone group for a toss in India who had just entered in 2007.
- Vodafone has been trying to enter the Indian Stock Market, but couldn’t make it due to various hurdles. Idea opens doors for the listing of Vodafone Group in Indian markets.
- The British firm has its telecom services in various countries in the world. While too much of concentration on India, they might miss the bus in other developing nations. While Aditya Birla Group has only one country to run its business, it can be rest assured in its investments in India.
- Vodafone Group, gets a cash takeaway of Rs.3900 care for its 4.9% stake and rest 9.5% stakes cash is yet to come to the British firm in four years when Idea buys the stock at Rs.130 per share. This policy is done to maintain an equal shareholding between the two investors.
- To deal with Jio, they need deep pockets. While Aditya Birla Group is a major company, it gets assistance from Vodafone Group who has already committed a $6-7 Billion investment in India to improve its returns. This is an added benefit for Aditya Birla Group.
- They can take a call on what to do with the 9.5% stake it is due to acquire in four years depending on how the market performs. It can accelerate the process if the returns for the new entity are good or allow Vodafone Group to dispose the shares after the four year period to equal the shareholding of both the entities.
While the above factors just say one thing, this is a deal between the equals who can boast a superior telecom company and get assured/desired returns.
Vodafone India is mostly predominantly being an Urban Centric company while Idea has more subscribers in the rural areas. Idea is trying to make in-roads with premium customers dominated by Airtel and Vodafone, Vodafone lacks connectivity in rural areas. These points play in favour of the entity. Vodafone has a strong subscriber base in metros like Delhi, Mumbai and Kolkata, A circles (high population regions) like Karnataka, Tamil Nadu, Andhra Pradesh, Telangana, and Maharashtra while Idea has a strong subscriber base in B circles (medium population regions) like West Bengal, Rajasthan, Kerala, etc.…. But both the operators lack subscriber base in C circles like Assam, Bihar, etc… due to low ARPUs from customers in these regions.
This will reduce the cost of obsolete inventory for both the operators. Idea is planning to sell its 11% stake in Indus Towers to reduce the debt in the new company, integrate the operations within two years and reduce unwanted towers and stores in-order to reduce costs. The new entity can fight the competition better with a huge market share to experiment new pricing and tackle the Jio effect and keep Airtel at bay.
With no need to buy spectrum in the near future and catering all segments of the population from 2G to 4G users, the new entity would target to invest in developing facilities to improve the connectivity and customer service and also deploy necessary equipment for 5G network (Internet of Things). We can hope that Jio, Airtel and Idea – Vodafone can bring 5G at the same time as the world gets it. It took 25 years for 2G to come in India, 10 years for 3G and 5 years for 4G; the consolidation will get 5G to India as it is rolled out across the world.
While there aren’t many hurdles for the company except for complying with the Indian Merger & Acquisition laws
According to the Indian Telecom law
- No entity after the merger can hold more than 25% spectrum in one circle.
- No entity after the merger can have more than 50% market share in one circle.
While the operators target different segments, they have left no stone unturned to invest in urban areas and high ARPU states, in which they have bought a huge amount of spectrum and boast a combined subscriber base over 50%. This seems to worry the new entity as they can’t let lower ARPU customers go as it affects the reputation of the company, neither can it defy the M&A rules.
The Indian telecom industry is seeing a consolidation, but in the world’s second largest telecom market it is the “Survival of the fittest”. High investments on low margins would keep the businesses going or else we Indians are going to see a monopolistic environment in the future. By number of operators reducing and the consolidated ones trying to protect their investments by maintaining the ARPU, it is expected that the prices might slowly for telecom services in India.
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