Growth by merger – On the Vodafone-Idea deal

Both Vodafone and Idea stand to gain much from the merger in a tough market

The Vodafone Group’s decision to merge its India unit with the Aditya Birla Group-controlled Idea Cellular is a classic case of two companies recognising truth in the adage that ‘the whole is greater than the sum of its parts’. Of the two mobile operators, Idea functioned in its early years as a three-way joint venture involving the Tata Group, U.S. telecommunications behemoth AT&T, and the Aditya Birla Group. The proposed deal represents a welcome chance to resurrect its flagging fortunes.

The last three quarters proved a brutal testament to the ravages that heightened competition could wreak on a middle-of-the-pack firm’s operational finances.

In Vodafone’s case, the planned merger offers the global telecom major an opportunity to downsize its engagement with a market in which promise has outweighed performance, without actually exiting it.

To that extent, it is a win-win for both parties. Set to vault the combined entity to the top of the heap in India’s 1.13-billion subscribers strong mobile phone services market, the ‘merger of equals’, as the two companies described it, will enable Vodafone to straight away net about ₹3,900 crore on consummation of the deal by selling a 4.9% stake to the Aditya Birla Group, leaving its holding in the new company at 45.1%. Idea’s controlling shareholders will have an opportunity to increase the 26% stake they will have at the start of the relationship by acquiring more shares from Vodafone over the next four years.

The two firms expect to see substantial cost savings as the projected synergies from capital and operational expenditure help focus on meeting the challenges of a fast-evolving market amid a tariff war with the current leader Bharti Airtel and the ambitious recent entrant Reliance Jio.

Nevertheless, the merger, however grand the scale, could well end up being less than adequate to help staunch the flow of red ink amid an industrywide slide in average revenue per user and the steadily escalating cost of bidding for fresh wireless spectrum.

With mobile number portability having made it easier for customers to switch networks on account of service quality levels or pricing, Vodafone and Idea have their work cut out in the lead-up to the merger, which they expect to close in 2018.

For Vodafone, the prospect of having to meet a huge bill of about ₹21,000 crore, were it to lose its arbitral challenge to a tax claim dating back to the transaction that paved its entry to the Indian market, must surely have been a significant consideration in tipping its hand.

As the company’s Chairman Gerard Kleisterlee wrote in the 2016 annual report: “While India represents an excellent long-term investment opportunity, the present regulatory challenges are hampering economic development… and this is exacerbated by other ongoing regulatory and fiscal burdens.” Time alone can tell whether this will end up as a truly successful marriage.

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