Vodafone India and Idea Cellular, India’s second and third largest operators, have agreed to merge their operations in the country to create a new market leading entity.
The combined operations will have almost 400 million subscribers and a market share of around 37%, as well as a market valuation of roughly $23.2 billion, according to a Vodafone statement. The unit will have six independent directors, with Vodafone and Idea each taking three seats on its board, and will surpass Bharti Airtel to become the largest operator in India.
Vodafone Group will sell a 4.9% stake in the combined firm for INR38.7 billion ($580 million) to holding companies controlled by Kumar Mangalam Birla, the chairman of Idea’s lead shareholder Aditya Birla Group. This exchange will leave Vodafone holding 45.1% of the new entity, with Birla’s firms holding 26% and the remainder owned by the public.
The new entity’s chairman will be proposed by Birla, while Vodafone will select its CFO. The deal requires the seal of approval from creditors, government authorities and shareholders, but if it receives the green light it is expected to close in 2018.
Idea’s board has approved the deal, while Vodafone Group CEO Vittorio Colao described it as a “momentous” opportunity for the sector in India, trumpeting the benefits afforded by the huge increase in spectrum and claiming that the deal “creates a better industry structure”. The merger would cut the number of major players in India’s telecoms sector down to five, with the new entity taking the top spot, followed by Airtel and Jio.
Vodafone Group CFO Nick Read talked up the synergies that the merger partners are anticipating, saying that the Indian unit of Vodafone was “strong where Idea are weak” and vice versa. The group noted that the merger would deliver scale across India, with “a debt of spectrum in all circles, and a compelling data road map”.
India’s telecoms sector has faced major disruption with the 2016 entry of Reliance Jio to the market. The newcomer surpassed 100M subscribers in five months by offering free voice and data, couple with the allure of its 4G offering. Vodafone and Jio confirmed rumours that they were holding merger talks in January this year, and Colao did not deny speculation that the increased competition presented by Jio prompted the discussions.
However, he also noted that Jio’s strategy had a time limit and that Vodafone/Idea’s new entity would be prepared to compete, saying: “their free data offering is finishing in April, they have to charge, and both Vodafone and Idea have increased data allowances to respond effectively to the newcomer. This deal improves the industry structure and allows us and Idea to be more competitive in the future. No doubt the other players will remain competitive but nothing will remain free forever, and the market will grow again. If someone else comes into the market with $25-$30 billion in funding and start giving stuff away for free, their shareholders will still want to see a return some day.”
Colao also hit out at claims that Vodafone had reneged on its previously stated strategy of leaving markets where it did not fully control its operations, saying: “This is maximising the value of our assets. Having 100 per cent ownership of a smaller player is less appealing than having co-control of a much better and stronger asset. I prefer to own half of a much better double sized asset than 100 per cent of a half sized one.”
At the end of 2016, Vodafone took second place in India with a 19% market share, while Idea was third with 18%. Bharti Airtel meanwhile led the market with 25%, with a total of 264 million subscribers. However, it is in the process of acquiring Telenor’s Indian unit, which will deliver it a further 54.5 million subscribers for a 30% market share.
