Shares of Idea Cellular surged nearly 30 percent on BSE on Monday on news that it is in talks with Vodafone India for a possible merger. Idea shares spiked as much as 29.17 percent to touch an intraday high of Rs 100.5 as the news filtered through. The stock finally closed the day at Rs 97.95, up 25.9 percent on BSE.
In a brief statement, Vodafone India confirmed that it was in talks with the Aditya Birla Group “about an all-share merger between Vodafone India (excluding Vodafone’s 42 percent stake in Indus Towers) and Idea.”
The statement also said that any merger would be effected through the issue of new shares in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India. Vodafone said there was no certainty that a transaction of this type will be agreed, nor as to the terms or timing of any transaction.
Idea Cellular too confirmed the merger talks.
Idea Cellular is India’s third-largest wireless provider, behind Bharti Airtel, by number of subscribers, followed by Vodafone India. The entry of Reliance Jio Infocomm, with its pan-India 4G network, late last year, has accelerated the long-anticipated consolidation in the Indian telecom sector.
Bharti, Vodafone India and Idea have all had to cut rates and offer more attractive data plans to compete with Reliance Jio, which started off by charging no tariff on data (since September 2016 onwards) and subsequently expecting customers to choose from a range of plans. Bharti Airtel’s December quarter numbers, which were reported earlier this month, also reflected the aggressive competition in the sector.
The merger move is seen as a clear step by both companies to take on growing competition from rivals such as Bharti Airtel and Reliance Jio, at a time when the pressure on mobile margins continues to be high.
If the Vodafone-Idea talks are successful, it could mean a backdoor listing for Vodafone India, analysts say. Vodafone India has for years indicated its plans for an initial public offering (IPO), but never got around behind it. Analysts have said that market conditions being what they are, it will be difficult for Vodafone India list in the near term.
The merger could create a telecom services behemoth, analysts said, both in terms of revenues and subscribers. According to a report from CLSA the combined entity would have 43 percent revenue market share and have a 40 percent active subscriber market share. The merged entity would account for over 25 percent of allocated spectrum and will have to sell about one percent to comply with spectrum cap norms.
“The talks to merge as a step to survive the competitive onslaught from other market players,” Shobhit Khare, co-founder of Inertia Wealth Creators LLP, an investment advisory firm, told Forbes India. Both Vodafone and Idea stand to gain from the possible merger. In the case of Vodafone, it was looking to decongest its India operations. Although the company has for years indicated their interest for an IPO, there has been no further clarity on the same.
Analyst Sanjesh Jain from ICICI Securities, however, said the merger of Vodafone India and Idea Cellular is not an optimal option because the merged entity would exceed 50 percent of the adjusted gross revenue (AGR) market share limit in seven circles (in three of which it is already more than 60 percent).
“The merged entity would also exceed spectrum capacity in seven circles, which it would need to sell for free to the government,” Jain says in the report.
Vodafone officials have been bullish about their position in India. “We think Vodafone in India is strongly positioned for the future,” group CEO Vittoria Colao had said in November last year, discussing the group’s September quarter earnings. Vodafone bought spectrum to put it in a competitive position in the 17 out of India’s 23 telecom circles, where the company operates, the CEO had said.
Vodafone estimates that in India, a country of 1.3 billion people, while the apparent mobile phone penetration is 77 percent, real penetration is only 40 percent, Colao had said. The reference is to the 254 million estimated smartphone owners in India. Of that, 4G handsets represent only 8 percent.
(With inputs from Pravin Palande)(Disclaimer: Reliance Industries Ltd is the owner of Network 18, publisher of Forbes India)