Vodafone-Idea Merger: What's Next In India's Telecom Consolidation?

by Sohini Bagchi    Mar 20, 2017

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Ending months of speculation, the boards of Aditya Birla Group and Vodafone Group have approved a merger between Idea Cellular and Vodafone India Ltd. The combined entity would now become the country’s largest telecom operator, with almost 400 million customers, 35% customer market share and 41% revenue market share, Idea said in a regulatory filing. As per reports, Kumar Mangalam Birla will be Chairman of the merged company. The merger makes possible synergies of $10 billion, Vodafone CEO Vittorio Colao said in a statement.

Analysts see the move as an outcome of the fierce competition and a phase of consolidation in the telecom sector, which has intensified after the entry of Reliance Jio in the country in September 2016. The Mukesh Ambani-led telco, as part of his Reliance Industries conglomerate, created revolution with free voice calls and cut-price data services, forcing India’s biggest operators - Bharti Airtel, Vodafone and Idea - to slash prices and accept lower profits. 

Read more: Reliance Jio Spurs Competition, Consolidation Among Telcos

Almost every telecom player in India is now forced to challenge Reliance Jio’s growing subscriber base to survive and sustain. With the recent merger of Vodafone’s Indian subsidiary with rival Idea Cellular, telcos believe it can create a new market leader that can contest the ongoing and new price war.

A number of deals over the past few months further suggest that the sector will be ruled only by a handful of large telecom operators, compelling the weaker telcos to exit altogether. 

Last week, Reliance Communications (RCom) said that market regulator Securities Exchange Board of India (Sebi) as well as stock exchanges National Stock Exchange of India Limited (NSE) BSE Limited (BSE) have approved the merger with Aircel, making the new entity the country’s third-largest telecom operator.

Read more: Is It Curtains For Brand RCom Post Aircel Merger?

A report from the Economic Times later last week suggests that the Tata group and merged RCom-Aircel, MTS may be further looking to join forces to counter the tough competition from Reliance Jio. Anil Ambani, Chairman of the Reliance Group, is believed to have initiated talks on the matter with the newly-appointed Tata Sons’ Chairman N Chandrasekaran. However, sources close to the matter told the publication, “nothing has been finalized yet.”

If the RCom merger goes through, then then the combined entity (with the four players RCom-Aircel-MTS-Tata Tele) will become the third largest telecom player  will look to grab the third spot in India’s telecom sector, just behind Bharti Airtel and Vodafone-Idea. The proposed merged telecom entity is expected to have over 260 million subscribers and a market share of 18%.

Currently, Bharti Airtel holds the top spot in the Indian telecom space with 266 million users and a 31% market share. If Vodafone and Idea Cellular go through with the merger, they will become the largest telecom by user base and revenue market share. As of December 31, Vodafone and Idea have 205 million, 190 million users respectively. While Vodafone commands a 23% market share, Idea enjoys 19%, making it a total of 42% if combined.

Read more: Will Reliance Jio Do To Data What R-Com Did To Voice

In a recent note, analyst firm Fitch suggested the Indian telecom industry should continue to consolidate and it expects five to six operators to emerge from the shake-out. “Unprofitable telcos, such as Telenor and Tata, could exit, given that their businesses will struggle to compete and they are now able to monetise their most valuable assets — their under-utilised spectrum,” the note said.

Meanwhile, RJio recently announced that it had reached a 100 million subscriber base. “When we started Jio, we set a target for ourselves that we will acquire 100 million customers in shortest time. Even we didn’t imagine that we would do it in months,” said Mukesh Ambani at an event.

Speaking about the telecom consolidation trends, Prashant Singhal, Global Telecom Leader EY commented, “Market consolidation is positive for the telecoms sector and the consumer. As operators grapple with excessive competition and pressurised margins, consolidation will help bring synergies and unlock greater cost efficiencies. The consumers will also benefit as the telco strategy will now pivot on innovation to offer value in terms of quality of service and content. Now that the sector is inching towards its ideal state, it is imperative for the Government to expedite approvals for the industry to realise the benefits.” 

According to Rajan S Mathews, Director General, COAI, “This trend of mergers and consolidation, will however remain a positive development, benefiting customers, operators and Government in the long run on global lines.  The need of the hour however is, a predictable, stable, long term, regulatory and policy environment, to ensure the financial health of TSPs and a conducive environment for continued investments for a fully connected and digitally empowered India.”

However Fitch Ratings warned that the ongoing consolidation drive will also lead to massive layoffs in the Indian telecom industry with as many as a third of over three lakh employees becoming redundant in the next 18 months as consolidation plays out.