New Delhi: While Vodafone India and Idea Cellular Ltd could combine to become the largest telecom player with lead in 12 of the 22 circles across India, the regulatory and operational hurdles with the disadvantages that the companies inherit could impede a smooth merger.
“We believe litigations and integration of different operational styles would take long to tide over, “IDFC Securities said in a note issued on 30 January expecting 1:1 ratio merger for Idea and Vodafone.
What works for Idea and Vodafone together?
• JP Morgan Asia Pacific Equity research has estimates a 5.5 times enterprise value/ EBITDA (earnings before interest, taxes, depreciation and amortization) to the combined entity, similar to that of Bharti Airtel’s. Enterprise value is the economic value of a company. The improvement in EBITDA would be a result of savings in network cost.
• The two would have strong capacity and coverage spectrum holding on weighted average basis of around 46MHz of spectrum pan India, while Bharti Airtel Ltd holds 33.5MHz of spectrum on weighted average basis across India.
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• As their spectrum holdings in various block lie next to each other, the companies can create larger blocks of 4G airwaves in 900MHz band without harmonization. The combined entity will have coverage advantage in 17 circles in the 900MHz band thereby securing 90% of their revenue stream.
• As per analysts at IDFC, the combined entity will have 130 carriers across 3G and 4G networks, much higher than 109 carriers with Bharti Airtel and 110 carriers with Reliance Jio Infocomm Ltd.
• Vodafone’s impending plan to be listed on a stock exchange in India could be executed without taking the IPO route. Vodafone India has been planning to list on India’s stock exchange since 2010 but the plans have been put on hold by the parent company, citing market conditions and its performance.
• Revenue market share at 43%, higher than the market leader Bharti Airtel at 33% with Idea’s strength in rural markets and Vodafone’s key presence in key markets including Delhi and Mumbai. The combination will be No. 1 in almost 11 circles, said an industry expert requesting anonymity.
Chink in their armour
• The combined entity would have to surrender excess spectrum in as many as five circles in Gujarat and Maharashtra in 2500MHz band and in Gujarat, Kerela, Maharashtra, Haryana and UP (West) in 900MHz band. The department of telecommunications’ guidelines to merger states, “No refund or set-off of money paid and/or payable for excess spectrum shall be made” by the government.” In such a scenario, the only option to generate funds is by selling the excess spectrum to competitors, in turn strengthening their spectrum portfolio. Also, in absence of choice, the merged entity will be unable to command spectrum sale prices.
• For Vodafone India and Idea Cellular Ltd combined, the subscriber base share will exceed the set limit of 50% in as many as nine circles and the revenue market share will surpass the 50% threshold in at least five circles, which are key circles. Credit Suisse in a note issued on 30 January estimates the revenue loss due to these guidelines to be worth Rs6,000 crore or more in 900 Mhz band alone.
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• Analysts at Jefferies Equity Research India expect control of the merged entity to be a “moot point” and competition in the market to still weigh on profit of merged entity, if at all the merger sails through. “Management bandwidth would be taken away in integration and could prove costly in the face of intense competition from R Jio,” Jefferies said in a report on Monday. Similarly, IDFC Securities states that the pricing pressures would continue even with three large players (if merger happens) as companies with deep pockets would fight for data market share and competition would remain intense in next financial year.
• Vodafone’s unresolved taxation issues with Indian government could be a contingent liability that the merged entity will inherit. The dispute amounts to $2.5 billion and into arbitration since 2012 when the Indian government amended tax laws retrospectively.