geralt / Pixabay

Why and how are Vodafone India and Idea merging?

 

Whenever a sector or an industry is facing a disruption from a new player in the market, the most obvious choice for the companies in the said sector is to either join hands with the rivals to brave the storm or shut their shop. This is what the investment of 2 lakh crore Indian Rupees or almost 30 Billion $ at current market price by Mukesh Ambani’s Reliance Industries into Reliance Jio Infocomm has done to the Indian telecom industry.

 

How much stress has been induced in telecom industry by Jio’s entry?

Sunil Bharti Mittal, chairman of Bharti Enterprises Ltd. said that you may as well put the money in the bank and get a decent return and go out and play golf. These words describe how Airtel is feeling the heat from Jio as according to Mittal, the return on capital employed has fallen to low single digits.

And that is why Jio’s entry into the Indian telecom sector has given birth to major consolidation. Airtel and Telenor have merged their operations and so has Anil Ambani’s Reliance communication with Aircel. Even Tata Teleservices wishes to go ahead and merge with RCom-Aircel. Although Vodafone and Idea were flirting with the idea of merger since 2016 but the aggressive entry by Jio sealed the deal and has given birth to the biggest telecom player in the country.

 

What do Vodafone and Idea get out of this merger?

The word to look for while analyzing a merger is synergy. The management of Idea and Vodafone India are hoping the merger will allow them a synergy in the form of consolidation of network sites leading to saving of billions of dollars per year. Some synergy also comes in the form of reduced employee cost as many redundant employees are likely to be laid off but Kumar Mangalam Birla has denied any such moves for now.

Other then the immediate cost savings from synergies the combined Vodafone-Idea entity has big future plans. Kumar Mangalam Birla says that the merger will allow Aditya Birla Group to create a high quality digital infrastructure that will transition the Indian population towards a digital lifestyle and make the Digital India vision of the government a reality. Vodafone CEO Vittorio Colao said the combined company will have the scale required to ensure sustainable consumer choice in a competitive market.

 

How big is the Vodafone India and Idea’s merger going to be?

The merger could result in a company with 400 million customers i.e. 35% market share by volume and an even better 41% market share by value. Although the name of the merged identity is yet to be released it is already the biggest telecom services provider in India.

KRiemer / Pixabay

What is the structure of the merger?

The merger of Vodafone India and Idea is being touted as the merger of the equals even when the revenue of Vodafone India is higher than that of Idea. Going ahead with the notion that this is the merger of equals how much would be the ownership of K.M. Birla’s Aditya Birla Group in the merged identity?

Idea is a listed company and promoters hold 42.4% in the company and rest is held by public shareholders. This would give K.M. Birla an ownership of 50% of 42.4% i.e. 21.2% in the merged identity. But K.M. Birla wanted at least 26% ownership in the firm so he needed another 4.9% (21.2+4.9 = 26.1) and hence the merger will be completed as soon as Vodafone transfers 4.9% ownership to Aditya Birla Group for Rs 3874 crores.

There are other finer details in the agreement which ensures that the ownership of ABG (Aditya Birla Group) and Vodafone in the combined entity are the same after 5 years. The rest of the ownership will be with public shareholders as Idea is a listed firm and the combined entity will stay listed as well.

 

What does it mean for the customers?

The existing customers of Vodafone and Idea will have better services for sure as Vodafone has stronger network in metro and urban areas where as Idea has a strong foothold in rural areas. So rest assured you will never be out of coverage area!

 

But what will happen to the rest of the customers i.e. mobile phone users?

As Vittorio Colao of Vodafone said nothing is free forever, Jio will have to charge sooner or later. So may be the Jio customers will finally have to pay for using the high data consuming apps like Instagram or may be even Tinder. And when that will happen the cheap data rates for other telecom service providers like Airtel will see a price increase as well.  

 

About the Author:

This article has been written by NavDeep Sehrawat, who is an MBA student with IIFT (Indian Institute of Foreign Trade – one of the most reputed business schools in India).