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Vodafone, Idea in merger talks; experts cite regulatory huddles

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.

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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.  The merged entity would get a year to align with these caps but it would have to part sell/surrender spectrum to be below the cap, CLSA report had stated.

Also the new entity would have to pay Rs 5,700 crore to liberalise its administered spectrum which would be offset if the merged entity can sell excess spectrum worth Rs 5,400 crore, it added. Idea rose as much as 29 per cent, the most since the shares began trading in 2007, taking the company's market valuation above USD 5 billion. On the positive side, CLSA had said that such a mega deal will change the industry order. Not only would the combined entity become the industry leader but also a strong competitor in the data market with 3G spectrum across India and the highest 4G spectrum in the 1800 Mhz band.

The merger, if it comes through, will create a new market leader in the mobile as well as data segments challenging both Bharti Airtel and Jio, and further intensifying tariff war, say industry experts. Backed by India's richest man, Reliance Jio Infocomm is offering free voice calls and data till March and has notched up 74 million users. It has already invested over USD 25 billion and is investing another Rs 30,000 crore (USD 4.8 billion).

"With a merger, Vodafone-India would have a 43 per cent revenue market share. Bharti Airtel currently leads the sector with 33 per cent revenue market share and we forecast a 13 per cent share for Reliance Jio by FY19. The merger will help Vodafone India improve its positioning in the mass market, while Idea Cellular would gain from Vodafone's strengths in metro circles," CLSA note had pointed out.

"Moreover, Vodafone India's potential merger with Idea Cellular would also pave the way for backdoor listing of its business without going through an IPO process," CLSA added. Idea had posted an 88 per cent drop in its consolidated net profit at Rs 91.46 crore for the quarter ended September 2016, even as revenue increased by 7.2 per cent to Rs 9,300.23 crore in the reported quarter. Vodafone on November 15, 2016 had stated that it has registered a 2.60 per cent growth in its pre-tax profit for the April-September period at Rs 6,704 crore. The company's revenue growth stood at 5.9 per cent at Rs 22,579 crore during the reporting period.

 

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