Jio effect: Voda, Idea create telecom behemoth
Call it the Jio effect or its predatory pricing impact, with the arrival of Vodafone chief executive Vittorio Colao on Sunday night, the Voda-Idea merger seemed imminent. And so it happened as it was announced on Monday morning in a $23.2 billion deal, creating a gargantuan telecom company, the biggest in India.
This move works well for Voda for not only does it get a listing in India through the back door as it were, but more importantly puts in place a key tentpole for its own merger in Europe with Liberty Global. Liberty is keen on Voda's European business and is not interested in the beleaguered Vodafone India. Talks between Liberty and Voda UK began in 2015 but didn’t lead to a wider sale or collaboration at group level. But a week ago, the fourth floor of Voda’s Newbury HQ has been sealed off with access only granted to execs from both firms, insiders claimed, as a merger is being hammered out. In January, the pair completed a merger in the Netherlands to form a $3.7 bn joint venture. A similar deal could be struck in Britain, although Vodafone may decide to sell its UK operations to Liberty. In turn, Liberty — the US cable king that owns UK ISP Virgin Media — may sell its German arm to Voda.
With a combined heft of almost 400 million subscribers, it has overtaken Bharti Airtel to emerge as India’s number one mobile service provider.
Between them, they will now account for about 40 per cent of revenue of the world’s second-biggest mobile phone services market by users, after China.
Vodafone Group and Idea Cellular will initially equally own the venture. The European carrier will control 45.1 per cent of the combined company after selling a 4.9 per cent stake in the new entity to billionaire Kumar Mangalam Birla’s holding companies, according to a stock exchange filing on Monday. Birla’s companies will take a 26 per cent holding, with the remainder being held by the public. Remember that Vodafone is not listed in India. The transaction will help Vodafone unload an unprofitable business that has prompted it to announce $12 billion of additional investment and write down to fight competition from billionaire Mukesh Ambani’s startup while Idea is equally embattled with a huge debt burden.
Idea Cellular, after spurting 15 per cent on the news, collapsed to close at Rs 97.20, down Rs 10.90 and as much as 10.08 per cent.
Birla companies will fork out Rs 108 apiece for the 4.9 per cent stake in the merged entity, Saurabh Agarwal, head of strategy at the group, announced at the presser, which will work out to Rs 3,874 crore. The companies will have to pay Rs 130 a share if they want to raise their stake in the first three years and pay the market price in the fourth year, he said.
While it helps both entities do the usual things that come with a telecom merger of this magnitude, like better utilisation of spectrum, where the combined entity will have complementary footprint across India, the deal hopefully gives higher return to shareholders due to the bigger scale of the new entity.
The combined entity will need to reduce spectrum it holds in a few regions to meet regulatory norms, said Colao.
The excess airwaves will either be sold or returned to the government if they can’t find a buyer, he said.
Vodafone and Idea will each control three seats on the board of the new company, which in addition will have six independent directors. Birla will have the right to appoint a chairman.
Vodafone will automatically gain listing in the world’s second-largest wireless market, which it has been considering since at least 2011.
The competition among the different carriers will continue as they fight for market share in data, according to Rajan S. Mathews, the director general of Cellular Operators Association of India (Coai).
“Now everybody is competing very aggressively for data share and that means there will be continued pressure on prices,” said Mathews, adding, “Increasingly, operators will start looking to future opportunities like Internet of Things and cloud computing, and begin to focus on these to augment their revenues and profitability.”
Birla units, including Aditya Birla Nuvo, own 42 per cent of Idea, according to the company’s website.
Malaysian carrier Axiata Group Bhd has a 20 per cent stake. Vodafone India is a wholly owned unit of Vodafone.
In the quarter ended December 31, Idea reported its first loss for the group in about a decade. Idea reduced its voice calling rates by 11 per cent and mobile data rates by 15 per cent from the previous quarter.
Free calls and data offered by Reliance Jio also reduced data consumers on its network.
“We are very complementary,” Vodafone’s boss Colao told a news conference in Mumbai after the deal was announced, adding, “Idea is strong where Vodafone is weaker, Vodafone is strong where Idea is weaker.”
The two companies, which announced in January that they were in talks, will have to shed spectrum in some areas to meet India’s rules, although Colao said it would be “small”. The deal is expected to close in 2018.
Vodafone, which will cut its net debt by about $8.2 billion with the deal, has endured a tumultuous ride since it entered India in 2007, with a high-profile tax battle and a long-delayed Indian listing. India contributes more than 10 per cent of its revenues.
Colao said on Friday that the
pending case, with India demanding more than $2 billion in taxes, would not affect the deal, which needs
regulatory approval. The deal does
not include Vodafone’s 42 per
cent stake in Indus Towers, a joint venture between the British group, a unit of Bharti Airtel and Idea.
But Vodafone and Idea said they will look to reduce their tower assets exposure, including selling their stakes in the joint venture. Quick consolidation moves have seen Bharti Airtel in the process of buying Telenor’s India operations, while two smaller players controlled by Malaysia’s Maxis and Russia’s Sistema are merging their operations with Reliance Communications’ wireless unit.
“Consolidation is a much anticipated and very welcome development in this beleaguered telecom sector,” said Arpita Pal Agrawal, a partner and telecom analyst at PwC India.