Vodafone India and Idea Cellular officially tie the knot

The merger of Vodafone India and Idea Cellular to create India’s largest MNO has finally been completed.

The two companies first started publicly courting back at the start of 2017 but their protracted engagement took almost two years to come to fruition. The capex-intensive telecoms industry naturally tends towards M&A and the economies of scale it promises, but the brutal arrival of Reliance Jio hastened this process in the unusually fragmented Indian market.

The Vodafone announcement was of the stripped down type often associated with M&A – we didn’t even get a canned quote from the CEO saying how excited they are. There was plenty of reassuring talk about synergies, however, which was nice, and the new company is going to be called Vodafone Idea.

The combined effort claims 408 million customers, which makes Vodafone Idea the largest Indian MNO, with around 38% subscriber share according to Ovum’s WCIS. Bharti AirTel’s 30% share is relegated to second place, while Jio continues to grab subscribers and is a solid third with a 19% share.

It remains to be seen how smooth this merger will be and how much of the anticipated $1.5 billion of synergies will ever be realised. Thanks largely to Jio the Indian market has gone from being highly fragmented to just four players (BSNL has around 10% of subscribers). The brutal price war seems likely to continue and, as much as anything else, this merger seems designed to ensure the two companies involved can survive it.

Idea Cellular has a bright one

Idea Cellular has announced it intends to raise €882 million of equity so it doesn’t have to sit at the kiddies table following the merger with Vodafone’s Indian business.

€425 million will be sold off to current shareholder Aditya Birla Group (ABG), increasing its stake in Idea from 42% to 47%, while the Idea board will explore other avenues to raise an additional €457 million. The cash, along with the proceeds from the sale of Vodafone’s and Idea’s standalone tower business, will be used to strengthen the balance sheet ahead of a renewed assault on the Indian market.

While the numbers are relatively complicated, we’ll try to break it down as simply as possible. Following the investment from ABG, the investment group will increase its stake to 26% of the merged entity, while Vodafone’s stake will stand at 47.5% upon completion of the deal. Due the conditions of the deal, Vodafone is also free to sell an additional 2.4% of the merged business without any restrictions. Anything below this will seemingly be subject to the approval of the other two.

Idea will own the rest of the business, but with the additional funds it raises to add to the war chest, it will at least have a bit more credibility when it comes to decision making on how to tackle the Reliance Jio problem. Two minds are better than one, and with ABG in the mix, lets hope that phrase extends to three. Another phrase we like concerns cooks and a broth.

While the merger was initially set to be completed towards the end of the year, progress is seemingly going better than expected. The Competition Commission of India has already approved the merger, accelerating the expected completion of the deal to the first half of the year.

Soon enough Bharti Airtel will be relegated to second place with the new Vodafone/Idea entity rising the ranks. Scale, both in terms of customers and network footprint, will certainly help address Jio, but improving the proportion of postpaid subscriptions in the developing market should be considered a top priotity. Jio is proving more successful than anyone else here, so thinking caps on.

Idea earnings show merger can’t come soon enough

Idea Cellular has reported its latest quarterly figures and they don’t make for good reading. The Vodafone merger seemingly can’t happen quickly enough.

Total revenues for the quarter demonstrated an 8.6% quarter-on-quarter decline, while year-on-year revenues decreased by an breath-taking 19.7%. After making a handsome profit of $660 million in the same quarter of 2016, the team swung to a loss of $180 million for the last three months. Market share has also declined from 19.4% to 18.9% over the 12 month period. Not many of the figures are heading in the right direction.

“While seasonal industry slowdown followed the past trends, as always ‘July to September 2017 quarter’ impact on Idea’s subscribers and revenue loss was more pronounced given its higher share of rural subscribers,” Idea said in a statement.

“This coupled with continued pricing pressure and GST change, resulted in overall company revenue declining to Rs. 74,654 million, a reduction of 8.6% compared to Rs. 81,665 million in Q1FY18.”

The decline in the fortunes of not only Idea, but the other big boys in Airtel and Vodafone, does not necessarily demonstrate poorly run businesses, more they weren’t ready for any change. This might be considered just as bad, this is the digital age after all where flexibility and agility are prominent buzzwords, but they were just completely un-prepared for any disruption to a stable pricing structure. Few people are ready for disruption, but looking back, many would point to perfect conditions for disruption in India.

Since the introduction of Reliance Jio, Idea has moved towards the unlimited voice and more generous data bundling options, but as you can probably see, the business is operationally not ready for it. If it was, the swing in fortunes over 12 months would not be so severe.

Perhaps the merger, and the efficiency benefits which scalability will offer, cannot come soon enough for a company which seems to be on the tip of a negative trend in profitability. A $180 million loss might sound bad right now, but it would surprise few if this continues to go downwards.

On the merger, things do seem on track. The pair have started collecting green lights from all the relevant regulatory bodies. Approval is still needed from the National Company Law Tribunal, and a few other organizations, but there haven’t been any major roadblocks so far.

Things are not going well right now, but maybe that doesn’t matter that much. The new combined business will create the country’s largest operator, and after this morning’s announcement to sell the tower businesses to ATC Telecom Infrastructure, the pair will be $1.2 billion richer. Perhaps it is a case of close the eyes, cover the ears and hold the breath, until the merger has been completely cleared.