Telecom: Competitive Bandwidth

If the Idea stock price is doing the talking, the merger between telecom biggies Idea and Vodafone, is nothing to rave about. The Idea stock lost about Rs 9,000 crore in market value since the merger was announced on 20 March.

The Aditya Birla Group company struck the deal to merge with Vodafone in January 2017, when Idea’s stock was quoting at Rs 72. What seems to be the shareholders’ loss may turn out to be a big win for Idea over the long haul, as cost synergies through spectrum increase. Lower operating costs may provide the much-needed competitive edge to the merged entity, enabling it to fence on equal terms with the new entrant — Reliance Jio, which has disrupted business models of older players.

It is no doubt a merger of convenience that ensures cost control, better competitive advantage and better product offering. It puts the duo far ahead in the market share sweepstakes than they stand to be as standalone players. The merger is also the need of the hour. Reliance Jio is offering ten times more data to individual subscribers at a fraction of the cost, while at the same time, it has made calling free, which has been the traditional revenue model of mobile operators. To compete, telecom companies have to reduce their costs and one way of doing this is to merge and acquire more subscribers and bandwidth.

The Idea-Vodafone merger is one of equals — one that will create the largest telecom player in the country. Both Idea and Vodafone will have a shareholding of 50 per cent each in the new venture. The merged entity will have 400 million subscribers, quite a bit higher than Bharti Airtel’s 269 million.

For telecom service providers, it’s now all about keeping and enhancing the subscriber base. Aditya Birla Group Chairman, Kumar Mangalam Birla said, “This merger of the current number two and number three telecom operators in India will create the country’s leading telecom company in India. The combined entity will have a subscriber base of nearly 400 million, and will command a revenue market share of 41 per cent and a customer market share of 35 per cent.”

The merger will complement the businesses of the two entities. In some circles, Vodafone is stronger than Idea. It will also allow the companies to compete on the new paradigm shift in voice calling, which has now become the norm. Said Vittorio Colao, Chief Executive Officer, Vodafone Group, “We are very complementary. Idea is strong where Vodafone is weaker and Vodafone is strong, where Idea is weaker. This is an excellent opportunity to give wonderful experience everywhere, and provide unlimited voice, which is now the norm in the market, but also a big amount of data.”

For Vodafone and Idea, the merger will result in synergies and cost reduction, bringing together as it does, the top two players in the Indian markets. The businesses together can achieve a substantial cost reduction. For example, Idea and Vodafone both have 2.73 lakh GSM sites respectively, which will now get rationalised over time to about 2.25 lakh sites. This network rationalisation among other synergies, is expected to drive margins higher by nearly 460 basis points.

Operational costs can be reduced by lower back-end operations and advertising costs, while rationalisation of IT and network systems will significantly reduce costs of capital expenditure (capex). In fact, the Idea-Vodafone merger is expected to result in savings of nearly Rs 14,000 crore, both in operations and capital costs, on an annual basis post completion of the merger four years later. This will be possible with the elimination of duplication and better operating efficiencies.

Over time, the merger and costs benefits that will accrue, will help reduce the total debt of the merged company, which is pegged at Rs 1.07 lakh crore. In the coming years, the combined debt could dip to about three times the operating profits from the current 4.4 times on an average. This will give higher returns on capital to our investors, because we have scale, and substantial opex and capex synergies. This is an attractive transaction,” said Colao.

The merged Vodafone-Idea entity is going to pole-vault to the first or second position in most circles, a structure that will enable the company to give further value-added offerings. The combined entity will now have a share of more than 20 per cent in all markets, except one, from 17 circles earlier.

Vodafone brings to the Idea subscriber its extensive international expertise and roaming capabilities. “Today we have the largest 4G network in the world, which will be available immediately. We also have the largest enterprise business in the world, not only for foreign companies coming to India, but also for Indian companies that are becoming bigger. Vodafone-Idea will be the platform for all the good, successful Indian exporters,” said Colao.

Over the years, the Aditya Birla Group has earned its stripes deriving significant cost benefits from its earlier acquisitions in the cement business. In the telecom space, too, the conglomerate may weave its magic of creating a significantly lower cost telecom operation. The road to cost rationalisation is going to be a slow and gradual one.

For one, the merger will take about a year or two to come to fruition and a delay could reduce the cost reduction benefits. If the merger yields the desired results and achieves a significant cost reduction on a higher scale, it could mean better growth for the telecom sector and better pricing for consumers in the long run.