Deal conclusion,cost synergies challenge for Idea-Vodafone: Experts


NEW DELHI: The Idea-Vodafone merger will create a behemoth with unmatched spectrum footprint and market leadership but long timelines on deal conclusion and cost synergies in a hyper-competitive market are likely to pose challenges, say experts.

“In our view, upside is restricted by hyper competitive scenario, with Jio expected to remain aggressive in race to gain revenue market share; long-dated cost synergies and lack of debt reduction in medium term,” EmkayBSE -0.59 % said in a latest report.

The progress on regulatory approvals would be closely watched as both the entities have a number of pending litigations, it added.

The combined entity is estimated to have annual cost synergies (capex and opex) of Rs 14,000 crore from the fourth year of merger, with 60 per cent this as opex savings. The largest component of opex synergy would be network followed by IT spends, Emkay noted.

“Initial years would have cost towards integration, which is estimated at Rs 133 billion (Rs 13,300 crore),” it said.

The targeted synergies are achievable and the combine is “unrivalled” in terms of revenue market share and spectrum, JP Morgan has said but flagged challenges such as execution of complex mergers and the back-loaded synergies.

It further said that “execution of such a complex merger is rarely perfect, revenue market share gains for the combine likely to track below expectations especially over the next 12-24 months given merger complexities and distractions”.

According to Jefferies, while the cost synergies are healthy, the “peak synergies will come four years post integration and uncertain given the sector set up”.

On the takeaways from the Voda-Idea merger announcement, Credit Suisse said “given the longish timelines for deal conclusion, even longer timelines on synergies, retention of competitive positioning and the extent of synergies projected”, the phase of seeking positives of merger will now be replaced with studying the assumptions and exploring the downside risks.

IDFC Securities felt that challenges for the industry are unlikely to change due to sustained aggressive strategy of Reliance Jio to gain scale. “We expect operational pressure would continue to mount with increased capex by incumbents to retain market share,” it said.

Religare said that while the merger is a positive outcome for Idea as it gives the company scale and access to capital, defending market share will be a challenge.

Stating that the synergies were a “long way off”, it said that the revenue market share loss could be a potential risk.

“Both Vodafone and Idea are estimating synergies…at the end of Year 4. We believe that weakening revenue market share (RMS) remains a key operating risk and estimate an RMS loss of Rs 42 billion (Rs 4,200 crore) for the combined entity in FY’19. This will largely offset any synergy benefits and hence recovery in industry growth will remain the key driver,” said Religare.

JM FinancialBSE -1.40 % said merger upside is tempered by extended completion and synergy timelines.

“While we see significant potential for value creation over the long-term (3-4 years), our near-term outlook is dampened by longer M&A approval cycle with risk of delays… lower opex synergies…rather extended time-frame for full synergy extraction…continued EBITDA erosion in the near-term, led by Jio,” JM Financial pointed out.