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Idea Cellular-Vodafone merger: How a fierce data war forced consolidation to create a telco giant

New Delhi: The merger of Vodafone India with Idea Cellular marks not only the largest ever consolidation in India’s telecom market, it will also test the ability of two large companies to operate a venture as equal partners in a highly competitive environment. The board of directors of Idea today approved the merger, in which Vodafone will initially holds 45.1 percent stake and Idea 26 percent, but Idea’s stake will be increased gradually. This merger should be good news for subscribers, who are already enjoying a data deluge at unheard-of tariffs due to heightened competition in the market – creation of this new merged entity should continue the data party for at least the foreseeable future.

India is the world’s second largest telecom market after China (by subscribers) and has been witnessing unprecedented upheaval with the arrival of Reliance Jio Infocomm in September last year. RJio focused on data, employing a 4G-ready network and promising unheard-of data speeds while offering voice calls for free, for life. This gimmick has already lead to a fundamental shift in the market, with incumbent telcos Bharti Airtel, Vodafone and Idea compelled to launch plans matching RJio’s offers. And bleed in the process. Bharti reported its lowest profit in four years in the December quarter of FY17 while Idea posted its first-ever quarterly loss since being listed on the bourses for the same quarter. The incumbents have been waging a battle for retaining subscribers relentlessly since then and consolidation was clearly the only way forward.

 Idea Cellular-Vodafone merger: How a fierce data war forced consolidation to create a telco giant

There was little sense in either Vodafone or Idea exploring a merger with market leader Bharti since this would have violated M&A norms. A merger of either Vodafome or Idea with Bharti would have been possible only if the percentage of adjusted gross revenue market share of the merged entity did not exceed 50 percent in even a single telecom circle. The guidelines also specify that the combined entity should have less than 50 percent of spectrum in each band individually in addition to having less than 25 percent of the spectrum allocated to all operators in all bands in all circles. These caps rendered the merger with Bharti impossible.

The next best thing was for Vodafone – which had already written down five-and-a-half billion dollars for its Indian operations already – and debt laden Idea Cellular to explore a merger. The merger would help Idea also reduce its debt besides allowing Vodafone to participate in an entity which is already listed on the Indian bourses.

The merged entity formed by Vodafone and Idea will usurp the telecom industry’s pecking order, becoming the largest telco with almost 400 million customers, 35 percent subscriber market share and 41 percent revenue market share. In a joint statement, Vodafone and Idea said that the merger will also help reduce the net debt on the British telecom giant’s books by a whopping Rs 55,200 crore. And generate considerable synergies.

The merged entity would hold 1,850 MHz of liberalised spectrum acquired through auctions; it will be capable of building substantial mobile data capacity by utilising the largest broadband spectrum portfolio with 34 3G carriers and 129 4G carriers across the country. A joint statement said “Substantial cost and capex synergies with an estimated net present value of approximately Rs 6700 crore after integration costs and spectrum liberalisation payments, with estimated run-rate savings of Rs 1400 crore on an annual basis by the fourth full year post completion”.

It also said Vodafone’s strong presence in metro circles and Idea’s leadership in semi-urban and rural telecom markets will allow for nationwide leadership within Indian M&A guidelines. In circles where both Idea and Vodafone India currently have a limited presence, the combined entity will become the “leading challenger” with the scale to compete more effectively and enhance consumer choice.

As with any mega corporate deal, the merger would also face some challenges. M&A norms may cause trouble in some telecom circles - brokerage CLSA pointed out earlier that the merger would breach the revenue market share ceiling in five out of the 22 circles in India. But a telecom market expert says the knotty problem of revenue market share cap breach may get resolved once RJio – which is offering free services till now – begins charging and the revenue market share dynamics shift. The merger will also affect the remaining telecom operators.

According to this piece which has quoted industry estimates, post-merger market share for Tata Teleservices will be 6.5 percent, BSNL and MTNL combine at 5 percent, Aircel at 5.7 percent and Sistema at 4 percent. Reliance Communications (RComm) is estimated to be close to Sistema’s share at 4.2 percent.

It then becomes incumbent upon these small players to either unleash another round of consolidation or wind up. The largest among the pygmies, Tata Teleservices, is embroiled in a legal tangle with its Japanese equity partner DoCoMo and this alone may prevent any near term consolidation.

And this piece explains attempts at a three way partnership between Aircel, Reliance Communications and Telenor. Consolidation seems to be the only way forward for India’s fragmented and highly competitive telecom industry.

In the end, why did a fierce war erupt and then escalate in India’s staid telecom space? Well, as RJio chairman Mukesh Ambani said recently, data is the new oil. The Indian consumer is consuming data like never before and telcos are scrambling to fulfill this demand without all of them having future ready networks. RJio’s ultra competitive data pricing has skewed the market in its favour, something the incumbents are fighting against.

Sample this: Analysts at Deutsche Bank AG have said in a note to clients recently that they expect growth in voice revenue for telecom service providers to decline at 0.5 percent CAGR over the next five years. During the same period, however, non-voice revenues should grow at 21 percent per annum, driven by 26 percent growth in internet data revenue. The rapid growth in data is likely to impact voice usage – a trend that has played out in every major telecom market around the world.

So according to Deutsche Bank, in FY15, India’s telecom industry was overwhelmingly voice, with voice revenue accounting for 80 percent of industry’s total revenue. This declined to 74.3 percent in FY16; remained more or less stable in FY17 at 73.45 percent but over the next three years, voice revenue are projected to decline significantly. Voice revenue for India’s telecom warriors will fall below the 70 percent mark in FY18 (at 69 percent of total industry revenue). In FY19, voice revenue is projected to be less than a third at 61 percent and will fall further to just a little over half of industry’s total revenue or 56 percent in FY20. So by the turn of this decade, a little less than 50 paise of every rupee generated in India’s telecom market will come from data and other non-voice revenue streams.

Is it a wonder then that the fierce data wars have forced a major consolidation in the Indian telecom market?

Disclosure: Reliance Industries, which owns Reliance Jio, also owns Network18 that publishes Firstpost

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Updated Date: Mar 20, 2017 15:16:36 IST