Abstract

In this competitive era, Mergers and Acquisitions have become an

integral growth strategy. Over the last two decades, due to the introduction of
major reforms by the government in innovation and technology, the scenario
of telecom industry of India has changed drastically. In the telecom sector,
mergers and acquisitions has been increasing to a great extent and companies
are using it as a strategic tool for improving their revenue and efficiency. In
the past ten years, Indian telecom sector has restructuring of the big shot
players like Vodafone-Hutchison Essar, Reliance- Aircel etc. The country is
again now ready to observe the two major prospective mergers in telecom
sector, that is, merger of Airtel with Telenor and Idea with Vodafone. This
paper is an attempt to analyze the strategic reasons for the forthcoming
mergers of the giant players in telecommunication and its impact on market
revenue share, stock price and profitability of the merged company. The
impact of these prospective mergers on the other leading mobile operators
are studied to examine the challenges and synergies involved in these
mergers. The study is based on analysis of secondary data collected from
various authentic sources.
Key Words: Mergers, Acquisitions, Telecom, Synergy, Valuation
1. Introduction

Indian telecom sector has witnessed a significant growth and emerged

as a noteworthy performer in the service sector and at the same time, Indian
Industries have grown tremendously and many strategic alliances has taken
place in India. Recently, Telecom sector is considered as the most volatile
sector in the country even though there are many mobile users in India. As per
IBEF report (February, 2017), India is ranked as second largest
telecommunications market in the world and is expected to contribute around
13.5% to have over 180 million smartphones by 2019, contributing around
13.5 per cent to the world smartphone market. Market Research Store in their
report mentioned that the telecom industry will grow by 10.3% each year and
will touch US$ 103.9 billion by 2020.

Indian telecommunication industry has become a classical example of

combination of government policies, innovation and new technology. Mergers
and acquisitions in telecommunication industry can be driven by the
development of new technology. Telecom companies for augmenting the
performance are now opting for mergers and acquisitions. They are using it as
a strategic tool for improving their revenue and efficiency. From the year
ranging 1985 to 2017 the number of mergers and acquisitions has grown
significantly in this sector.
1.1 Company profile

Vodafone Idea Limited is India's largest telecom operator with its

headquarter based in Mumbai, Maharashtra. Vodafone Idea is a pan-India
integrated GSM operator offering 2G, 3G and 4G mobile services under two
brands named Vodafone and Idea. Vodafone Idea also provides services
including Mobile payments, IoT, advanced enterprise offerings and
entertainment, accessible via both digital channels as well as on-ground touch
points, centers across the country. The company's vision is 'to create world
class digital experiences to connect and inspire every Indian to build a better
tomorrow'. As of July 2018, Vodafone Idea has 38.37% market share in India
with 443.94 million subscribers, making it the largest mobile
telecommunications network in India and second largest mobile
telecommunications network in the world. Vodafone Idea has a broadband
network of 340,000 sites, distribution reach of 1.7 million retail outlets.

On 31 August 2018, Vodafone India merged with Idea Cellular, and was
renamed as Vodafone Idea Limited. However, the merged entity continues
using both the Idea and Vodafone brand. Currently, the Vodafone Group holds
a 45.1% stake in the combined entity, the Aditya Birla Group holds 26% and
the remaining shares will be held by the public. Kumar Mangalam Birla heads
the merged company as the Chairman, with Mr. Balesh Sharma as the CEO.

History

On 20 March 2017, Idea and Vodafone India announced that their

respective boards had approved a merger of the two companies. The merger
got approval from Department of Telecommunications in July 2018. On
August 30, 2018, National Company Law Tribunal gave the final nod to the
Vodafone-Idea merger The merger was completed on 31 August 2018, and
the newly merged entity is named Vodafone Idea Ltd.[14][15][7].The merger
created the largest telecom company in India by subscribers and by revenue.
Under the terms of the deal, the Vodafone Group holds a 45.2% stake in the
combined entity, the Aditya Birla Group holds 26% and the remaining shares
will be held by the public.

Type Public
Industry Telecommunications
Predecessor Vodafone India
Idea Cellular Limited
Founded 1995; 23 years ago
Key people Kumar Mangalam Birla
(Chairman)
Balesh Sharma
(Chief Executive Officer)
Akshaya Moondra
(Chief Financial Officer)
Ambrish Jain
(Chief Operations Officer)

Products Mobile telephony, wireless broadband

Parent Vodafone Group

Aditya Birla Group
1.2 Rational of the study

The rationale behind Idea-Vodafone merger

The merger of Idea Cellular and Vodafone holds the potential for significant
cost savings and 3G/4G spectrum gain—crucial in market share battle against
Reliance Jio and Airtel

The success of the mega merger between Idea Cellular Ltd and Vodafone India
Ltd depends largely on synergy benefits that can accrue by combining
operations. Not surprisingly, the two companies are factoring in huge gains on
this count.

Vodafone and Idea said in a statement that annual savings, both in terms of
operating costs as well as capital expenditure, will be around Rs14,000 crore
annually by the fourth full year of operations as a combined entity. About two-
thirds of this will be on account of savings in operating costs.
The net present value of total savings (opex and capex) is estimated at
Rs70,000 crore ($10.5 billion).
Opex and capex are short for operating expenditure and capital expenditure,
respectively.

Reliance Jio not main reason for merger of Idea Cellular, Vodafone: Vittorio
Colao

While merging companies are typically quite sanguine about synergy benefits,
most analysts agree that the Vodafone-Idea merger holds the potential for
significant cost savings. With a larger scale and elimination of duplicate costs,
margins can rise substantially. However, with the two companies announcing
that Vodafone and Idea will exist as separate brands, some analysts are
questioning the expected gains from synergies.

Idea and Vodafone individually operate at an EBITDA margin of around 30%,

far lower than Bharti Airtel Ltd’s margin of around 40% and Reliance Jio
Infocomm Ltd’s targeted margins of 50%.
Ebitda stands for earnings before interest, tax, depreciation and amortization.
On their own, Vodafone and Idea’s holdings of 3G and 4G spectrum was far
lower than that acquired by Airtel and Reliance Jio. This also inhibited their
ability to compete effectively, given the shift towards increased data usage by
customers. Coming together will enable Idea and Vodafone to operate in the
same league, as far as spectrum footprint goes.

The combined entity will also be either the largest cellular services operator
in prominent circles, or a very strong No. 2. In a couple of circles, it will
upstage Bharti Airtel as the number one operator, while in some other ‘A’ and
‘B’ circles, it will graduate to a strong No. 2. It remains to be seen if the
combined entity will retain a half-hearted presence in the relatively smaller ‘C’
circles, or whether it will up the ante and aim for a strong pan-India focus.
Vodafone’s Indian escape act is heavy on the contortions
Nevertheless, a stronger market share in the majority of circles will also result
in better efficiency. One of the reasons margins are relatively lower at both
Idea and Vodafone is that these companies run EBITDA losses in some circles
where market share is sub-optimal.
The merger will also result in a sharp fall in leverage. Idea and Vodafone
expect the net debt/Ebitda for the combined entity to fall from around 4.4
times to around 3 times. This will be aided by asset sales—both companies
intend to sell their tower assets and reduce debt. Besides capex synergies will
contain debt to some extent in the future. In addition, opex synergies will
result in higher profits.
On a standalone basis, analysts at JM Financial Institutional Securities Ltd had
forecast Idea’s net Debt/Ebitda ratio to reach around 5.5 times by end March
2017. In contrast, the forecast 3 times net Debt/Ebitda ratio for the combined
entity is far lower.

With synergy benefits expected to result in higher profits and leverage

expected to reduce, the combined entity’s equity valuation is estimated to
soar, as the chart below shows.
,
For the deal, the two companies have been valued at around 6.35 times
enterprise value/Ebitda. Even if we were to assume similar valuations for the
combined entity, the estimated increase in Ebitda itself will result in a huge
jump in enterprise value. And with debt expected to reduce, equity
shareholders are likely to gain.
Merger with Idea Cellular signals Vodafone’s shrinking
interest in India

Of course, the big caveat in all of these calculations is the usual disclaimer: “all
other things remaining the same”. Things are not only not expected to remain
the same, they are practically changing each passing day, with Reliance Jio
making rapid strides in the market. Profitability may well come down
substantially for both Airtel and the Vodafone-Idea combine, as tariffs
continue to decline and freebies continue to increase. Besides, it’s anybody’s
guess where market shares settle a few years from now.
Even so, the fact remains that Vodafone and Idea will be in a far better
position together than trying to navigate the gigantic challenges in the telecom
market on their own.

1.3 Objectives of the Study

As most of the literature covers post-merger analysis and that too not in
Telecom sector so there is a need to study mergers in Telecom sector and that
too of the prospective mergers. Keeping this in mind, an attempt is made to
study the following objectives:

 To understand the strategic reasons for the two prospective

collaborations –Vodafone –Idea.
 To analyse the impact on market revenue share, stock price and
profitability of the merged company.
 To examine the challenges and synergies involved in these mergers.
 Foreign Players willing to enter India - India being a big market for
telecom has attracted attention of many foreign players. Due to
expectation of growth and profitability in Indian Telecom Sector, many
foreign players entered India. As it is not easy to start afresh because of
spectrum limitation and other entry barrier, the foreign players have
 used mergers and acquisitions to expand its footprints in India.
Examples- Vodafone acquiring Hutch stake in India, Japan’s NTT
Docomo taking stake in Tata Teleservices.

 Inorganic Subscriber Growth - Telecom sector in India is quite

competitive. It is difficult for smaller players to compete with biggies.
The big players are also keen on acquiring the customers of smaller
players as the market is getting saturated. In past 5 years, growth of
customer is quite slow compared to what is was 5 years ago.Example-
Reliance Communication and Aircel Merger. Below chart illustrate this.

 Decrease Costs - Average Revunue per User (called as ARPU) is one of

the lowest in the world. In this scenario to maintain profitability it is
important to cut down cost. Mergers and Acquisition helps in achieving
economies of scale by reducing infrastructure costs, operational,
marketing and HR Costs.

 Limited Spectrum - India is divided into 22 circles. Each circle has

limited amount of spectrum to be allocated to different players in each
of 2G, 3G and 4G Technology. So to grow, it is important to acquire
spectrums of other players. Mergers & Acquisitions are an easy tool to
achieve this. Below chart shows spectrum holding of 3G technology in
variou circles.

 Rapid change in Technology - Telecom sector has witnessed a rapid

change in technology like 2G, 3G and 4G. So, to achieve economies of
learning, firms are going for M&A. Indian Telecom firms are acquiring
smaller companies to learn future technology like IOT.

 Acquisition of Brand Value - Brand Name play an important role in

Indian Telecom Industry. Smaller firms can benefit a lot by merging
with bigger names. Example- RCom- Sistema Merger, Rcom-Aircel &
Airtel-Telenor.
Advent of Reliance Jio - After Reliance Jio Infocomm Ltd started services in
September, giving a lifetime free voice calls and 3 months of free data (which
was later extended till June next year), M&As had become unavoidable in
India’s hyper-competitive telecom industry. Idea Cellular and Vodafone Group
Plc.’s Indian unit said on 21 March they had decided to merge in a $23-billion
deal to create the world’s 2ndlargest and India’s largest telecom
company.Although they played down the Jio factor as a motive for the merger,
it’s clear that India’s No.2 and No.3 telcos had decided that, united, they had a
chance of better contending with Ambani, who has so far invested $20 billion
in the network. Market Leader, Bharti Airtel Ltd also reacted to it. Just 3 days
after the declaration of the Idea-Vodafone merger, Bharti Airtel decided to buy
Tikona Digital Networks Pvt. Ltd’s 4G business, including its broadband
wireless access spectrum and 350 cellular sites in 5 telecom circles, for
approximately Rs1,600 crore.
2. Review of Literature
An attempt is made to review various studies undertaken in context of
Mergers and Acquisitions in India in Telecom Sector. Some of the studies are
as:

Mantravedi and Reddy Including all the diverse sectors of India, no significant variations
(2008) is found in respect to effect on operating performance
subsequentto mergers.
Kumar and Rajib (2007) Majority of the studies on Mergers and Acquisitions are done
taking accounting measures into considerations.
Aggarwal arid Jaffe (1996) Designed techniques to compute the return on shareholder’s
equity through Mergers and Acquisitions.
George (2007) No sufficient evidence is found regarding the time duration for
which the impact of mergers and acquisitions can be observed.

Krishnamurti and There is a need to develop practical measures for analysing the
Vishwanath, (2010) performance of a merged company as the frequency, Value,
Numbers of Mergers & Acquisitions in India are increasing
continuously.
Dasgupta (2004) Reforms mainly economic reforms is the most important factor in
the growth of mergers in India as most of the mergers are results
of economic reforms initiated since 1990s.

Kale and Singh (2005) Observed that MNCs acquirer during 1998-2002 have earned
considerably larger return in equity market compared to their
local Indian counterparts.

Rani et al. (2010) Found that the main objective of mergers in India during
2003–2008 was to take benefit of synergies including expansion,
diversification, enhanced geographical reach, increased
profitability, better technology etc.

In majority of literature in Indian context, it is found that the work is done to

find the impact on profitability or on return to equity shareholders post-
merger.
3. Research Methodology
This paper is based on secondary data collected through TRAIsreport, COAI
report,leading newspapers and Companies websites. Mainly last quarter data
after Jio’s entry in the telecom sector is taken in to consideration. Future
growth of the merged company in terms of profitability, Market share and
stock market is analyzed by studying the experts comment and their report.
The scope of study is limited to September 2016 to March 2017.

Case study Research

Case study is an inevitable aspect of MBA programme. The word in itself
speaks about the volume of knowledge which an MBA Aspirant needs to
possess on multi-lateral issues occurring in the business environment. These
industries affect the economy of our nation and hence the growth and well-
being of the business is inter-dependent on them. In addition, MBA Case Study
also helps you gain considerable knowledge that you can use in the essay
writing (WAT) and Group Discussion (GD) round to make it to the top MBA
colleges.

In this article we will be discussing about a huge and an unanticipated change

that is being observed in the telecom industry between two telecom giants,
i.e. Vodafone India and Idea Cellular. Idea cellular which is owned by Kumar
Mangalam Birla have come forward with the proposition to merge with
Vodafone India. This would result in the biggest company considering the
number of subscriber base catered by both the players.

The merger will leave Bharti Airtel off its hook from being the number one
from past 15 years. There are several aspects that are to be looked into while
developing an understanding about the features associated with merger and
the impact it would make on the consumers and the telecom industry as a
whole.
Key Highlights of Vodafone-Idea Merger
The merger will give a higher stake to the promoters of Idea as compared to
Vodafone India so that in the long run both the companies are able to gain
access to equal hold

1. The first step for AB group would be the acquisition of 4.9 percent of shares
from Vodafone. This would amount to a total of Rs. 3874 crore wherein each
share is worth Rs. 108. This would be helpful in increasing the share holding
capacity of Idea to 26 percent

2. While Vodafone holds 45.1 percent of the shares in the merger, Idea would
be allowed to buy another 9.6 percent but at a cost of Rs. 130 per share in the
period spread over next four years. However, if Idea is unable to come up
equal to the shareholding percentage of Vodafone, it can go forward and buy
the number of shares required further but at the price prevailing in the
market

3. The chairman of the new combined entity would be Kumar Mangalam Birla
while Vodafone would appoint the chief financial officer. The CEO of the new
entity would be named jointly by both the companies under a joint agreement

4. The merger also gives the promoters of both the entities with a right to
nominate 3 members each for the board. There would be a total of 12
members on the board of which 6 would be independent
Significance of the Merger for Consumers

The merger holds significance for the consumers also, as a rapid change can
be expected in the market organisation and the telecom industry
development.

1. The Indian telecom industry would see the domination of three telecom
giants of which Vodafone-Idea would be the largest. Additionally, Bharti Airtel
and Jio have been found as the dominating counterparts in the telecom
industry.

Reliance Jio Amazing Facts

2. The process of branding will be individual for both the companies have
been found to have a complementary nature with respect to each other.

Impact of Merger on Telecom Industry

There are also several other implications that this merger will bring forth on
the telecom industry.

1. Firstly, there can be initiatives based on the renewal of price discipline for
the disruptive entry by Jio has caused some serious misbalance

2. Secondly, the poor financial health of the telecom sector can be observed
and through such mergers there will be infusion of health and life since India
is the fastest growing market in terms of the subscriber base.

3. Through the merger, Vodafone and Idea will overcome their debts and large
sum of credit will be infused in the system

4. The deal has also saved both the telecom companies from selling off their
business, as was being planned by them initially and this would directly
impact the quality of services being provided by different players in the
industry
The merger will surely boost the pace of the telecom sector. It has also been
found that the savings, synergies and also the spectrum will have substantial
impact on the escalating growth. There will be saving of over 60 percent of the
operations cost and this will aid in improving the quality and performance of
the service through investments from the saved money. Enhancement
in network infrastructure will be observed while the operational efficiencies
have a chance to reach excellence. Moreover, the revenue market share is
expected to rise for all the locations and the spectrum of the entity would
exceed the initial caps.

4. Data Analysis & Interpretation

With the entry of Reliance JioInfocomm Ltd. in the telecom sector with
an investment of about Rs 1.5 trillion in the month of September 2016 the
Indian mobile industry observed a turbulent phase. Launching of Reliance Jio
with its facility of free voice call and free data service created stress on the
existing players like Vodafone, Idea, BSNL and the market leader Airtel. This
has hindered the growth prospects of the leading telecom service providers.
Though these telecom operators have launched various plans in the form of
unlimited calling and bundled data still their revenue is declining. Keeping the
long term strategic goal in mind and to improve its market share and
subscriber’s share the major players i.e. Idea-Vodafone and Airtel-Telenor are
planning to gain through Mergers and acquisitions. It is expected that this
action will change the dynamics of the telecom Industry.
Strategic analysis of Idea –Vodafone Merger

The talks of all share merger of Vodafone India and Aditya Birla’s Idea
Cellular got confirmed in the month of January 2017.However, it excludes
Vodafone's 42 percent stake in Indus Towers. As per COAI's data (December
2016), Vodafone was the second biggest telecom service provider with 204.69
million users and Idea Cellular the third largest cellular with190.52 million. If
these entities combine it will result into the largest telecom operator 395.21
million subscribers. COAI data also revealed that market share of Vodafone as
on December was 25.27 percent and Idea 23.52 percent share and the
consolidated market share of nearly 49 percent.

During last quarter, Idea reported a loss of Rs 385.6 Crore and decline
in the revenue by 3.79%. Vodafone also posted operating loss of Rs 37,382
Crore in the first half of September. But this merger will result in increase in
operating profit by 3 percentage and the revenues of the combined entity will
be in the range 77,500- 80,000 crore range and the net profit margin before
tax will be around 28 per cent. The operating margins of the merged company
will also improve because of the synergy in cost leading to reduction in
operating cost .It will eradicate the duplication in costs arising from spectrum
capacity and structural requirements. It is estimated that the combined entity
will shed off its excess band in five circles under 900MHz band, one circle
under the 1,800MHz band and two circles under the 2,500MHz.

VodaFone – Idea consolidation news was positivelyreceived by the

shareholders of both the companies. Idea Cellular Ltd share’s spiked over
71.45% after the new of merger got confirmed on Jan 30.The market
capitalization of Vodafone India, Idea Cellular and Bharti Airtel Ltd
cumulatively rose by $4 billion on Monday. Shares of Idea Cellular and Bharti
Airtel are now 4-5% higher compared to levels before Reliance Jio’s launch.
Overall this merger will prove fruitful for both the companies.
5. Learning’s from the study/ Suggestations &
Recommendations

The merger of Vodafone and Idea Cellular will be watched keenly by

management gurus the world over. It is not often that an Indian company and
the subsidiary of a multinational corporation agree to come together.

Both are large organisations with distinct cultures. It will be

interesting to see how the merged entity will integrate the two cultures. It has
a challenge on its hands -- studies suggest a majority of mergers fail in this
crucial aspect.

What they will also watch out for is control of the company. To begin
with, the Aditya Birla group will own 26 per cent of it, while Vodafone will get
45.1 per cent. In four years, the Indian partner has the option to buy shares
from Vodafone with a view to equalise shareholdings.

The agreement provides equal representation for the two on the merged
company's board.
The fact is that the days of equal partnership are long over. It will need deft
interpersonal skills on the part of both to keep the show going.

And it will have two brands at its disposal: Vodafone and Idea.

There is some speculation that both the brands will be kept alive -- Vodafone
for the urban market and Idea for the rural market. That may be unwise.

Two brands will lead to extra expenditure and mixed messaging. If the whole
idea behind the merger is to achieve synergies and cut costs, there is no
reason why both the brands should continue.
At one time, Bharti Airtel had two brands: Touchtel for landline telephony and
Airtel for mobile. It soon realised the folly and decided on Airtel for all
services: Landline, mobile, DTH, payments bank.

Also, the significance of brands is often over-played in telecom.

In the past, several brands, including national ones like Hutch and regional
ones like Spice and Escotel, have vanished without causing a ripple in the
market. Their subscribers without a murmur of protest moved on to the brand
of the acquirer.

Of course, there will be sizeable synergies when the operations are merged,
though the announcement that the full benefits will accrue from only the
fourth year has somewhat dampened sentiments.

Vodafone and Idea Cellular have about 300 MHz of spectrum each for voice
calls. Of this, 400 MHz is good enough to handle the voice traffic from the
merged entity's 400 million subscribers -- the remaining 200 MHz it can
deploy for data. The subscribers are going to love it.

The merged entity will have on its books debt of over 1 lakh crore, but it will
come down after the tower assets get sold.

The merger comes at a curious time.

Reliance Jio's offer of free data ends on Friday. It will be interesting to see how
many of its 100 million subscribers convert to its tariff plan.

Called Prime, the plan is really attractive: 30 GB of data every month for 303,
plus an annual membership fee of 99 (voice calls, of course, are free).
However, most networks have come out with similar plans.

By all accounts, most Reliance Jio subscribers are also on another network;
given the uniformity in tariffs, it is possible that all may not choose to go for
Prime.

The battle of networks has entered its most decisive phase.

Everybody is bracing up for a tough few quarters ahead. The industry's
revenue is in decline, thanks to the tariff war -- by up to 5 per cent quarter on
quarter, if some experts are to be believed.

This is bound to impact the government's telecom revenue in the days to

come because it collects a whole lot of levies from the networks, based on
their (adjusted gross) revenue: Spectrum user charge (6 per cent, on
average), licence fee (8 per cent), and contribution to the Universal Services
Obligation Fund (5 per cent).

Also, there won't be too many takers for spectrum in the days to come. Bharti
Airtel is well stocked for at least a couple of years. The Vodafone-Idea combine
has no shortage of airwaves.

Besides, the industry is groaning under a debt of over ₹3 lakh crore. The banks
are worried about their exposure to the sector.

With their revenues under squeeze, it is difficult to figure out from where the
networks will find the money to take part in spectrum auctions.

Maybe the government will wake up to the crisis in telecom once its revenues
get hit.

The prime minister has clearly slipped into election mode, and his
government will need money to create a favourable impression on voters in
the next couple of years.

To ensure that the flow of money from telecom keeps going, the government
must ensure that the sector stays healthy. Several suggestions have been
made to provide relief to the networks, but none of those so far has been
taken up by the government.
6. Limitations of the study

Idea Cellular Ltd and Vodafone India Ltd announced a neatly

packaged merger deal in March 2017. The former’s promoters got the equal
rights they were looking for, and Vodafone Group Plc got to deconsolidate its
cash-guzzling India operations.

But with leverage at the two companies going out of whack since,
and constraints on capex already impacting market share, perhaps a rethink is
in order. The deal’s current structure puts limits on funding for these
companies. A tweak in the merger terms can improve liquidity and leverage
ratios considerably, and help in effectively staving off threats from
competitors Bharti Airtel Ltd and Reliance Jio Infocomm Ltd. The catch,
however, is that this may entail Vodafone ending up as a controlling
shareholder.

The merger agreement signed last year is based on equal rights

and equal shareholding between Idea Cellular’s promoters and Vodafone
Group. To achieve this, Vodafone has kept its 42% stake in Indus Towers Ltd,
valued at around $5 billion, out of the deal’s purview. It can also contribute
Rs2,500 crore more as debt into the merged entity. Even after all this, it would
have a 50% stake in the merged entity, while Idea’s promoters were expected
to have a 21.1% stake, based on ownership patterns at the time of the merger
announcement.

To bring about equal shareholding, Idea’s promoters had agreed to buy shares
worth Rs3,874 crore from Vodafone at the time the deal closes. It also has the
option of buying shares worth another Rs9,000 crore within a four-year time
frame.

As such, the deal is structured in a way where large amounts are expected to
change hands between the joint venture partners. Besides, while Vodafone
may soon be flush with funds after the Indus Towers sale, none of this might
find its way to the merged entity, lest it upsets the agreed shareholding
pattern.
This isn’t a problem in itself. But it is certainly odd if the merged entity is
constrained for funds at the same time. Already, Idea and Vodafone’s capex is
trailing that of Airtel and Jio by miles, and it’s showing in subscriber addition
numbers and revenue market share. Between March and October, Idea and
Vodafone’s active subscriber count has declined by around 4 million, while
that of Airtel and Jio has expanded by 14 million and 40 million, respectively.

Data collated by IIFL Institutional Equities shows that Idea and Vodafone’s
combined capex this year is expected to be half that of Airtel and less than a
fourth of what Jio is spending. In the preceding two years, their capex had
matched Airtel’s spends.

It’s true that liquidity at the two companies has improved in the past few
months, after the sale of their respective stand-alone tower businesses, as well
as an equity issuance by Idea. It will improve further when Idea disposes of its
11.15% stake in Indus Towers. But while liquidity might improve in the
interim, leverage ratios will remain elevated, simply because the tower sale
results in an almost equal reduction in Ebitda. Besides, the newly raised cash
will help in the near term, but constraints on capex will continue once the
funds are exhausted. Ebitda stands for earnings before interest, tax,
depreciation and amortization.

“High leverage would mean that Vodafone and Idea would be forced to cut
capex at a time when Bharti and Jio remain in high-capex mode,” IIFL’s
analysts said in a 5 January note to clients.

As this column pointed out last week, the merged entity might end up with a
net debt to Ebitda ratio of around seven times by the time the deal closes, in a
best-case scenario. This is higher than the agreed maximum leverage of six
times the companies need to ensure by September this year.
IIFL’s analysts estimate the merged entity needs an equity fund infusion of
Rs27,500 crore for ending up with a net debt to Ebitda ratio of six times.
Idea’s announced fund-raise of Rs6,750 crore, in their books, falls woefully
short.
Leverage ratios have gone out of whack thanks to the relentless onslaught by
Reliance Jio. By forcing competitors to keep tariffs low, Jio has caused profit
margins to plunge and cash burn to increase significantly. Idea is already
running large losses, and things deteriorated further in the December quarter,
thanks to the cut in interconnection usage charges and down-trading by
customers.

And just when investors had assumed there was stability on the tariff front, Jio
cut tariffs at the start of the new year . In short, there’s no relief in sight as far
as profitability goes. While the merged entity will extract large savings post-
merger, these are expected to be back-ended, and it will be a while before
profit margins start rising.
At the same time, by encouraging large data usage plans, Jio is effectively
forcing its competition to upgrade their capacity. In short, capex needs are
estimated to be higher than what was earlier envisaged.

A significant cash infusion into the merged entity seems like a good solution to
address these problems. If the equal shareholding constraint is off the table,
Idea’s promoters can use its funds to capitalize the company further, rather
than buy Vodafone’s shares. And even Vodafone can make a large infusion
using proceeds from the sale of its Indus stake.

While this may upset the agreed shareholding pattern, both partners will
ensure they are investing in a far more robust entity with a strong balance
sheet. As such, they can get more bang for their buck when the dust settles.

With the industry headed towards an oligopolistic structure, returns can be

decent once things settle; it makes sense for Idea and Vodafone to put their
best foot forward in the current market share battles.
7. Suggestions and Conclusion

Reliance Jio is the threat to most of the existing players in the

Telecom and for surviving in the competition, number of mergers
and acquisitions can take place in Telecom sector in India. There are
strong chances of improvement in the operating profits of the
merged companies. Merged companies can increase their presence in
more circles with the better tariff plans and technology due to
economies of scale. Merged companies can also fulfill TRAI
compliances easily and have better spectrum. With few hurdles, if
these mergers takes place, the merged companies will be better off.

 Creation of India’s largest telecommunications company with nearly

400 mn subscribers, combined RMS of 40.7% and CMS of 35.1%
 Combination a strong proposition for all stakeholders realize ‘Digital
India’ vision, deliver benefit to consumers and create shareholder value
 Equal partnership between Aditya Birla Group and Vodafone Group
 Strategic fit and complementary assets pan India broadband (3G/4G)
with robust spectrum profile, #1 / #2 position in 21 circles
 Significant synergies substantial cost and capex synergies with an
estimated NPV of ~INR 670 billion1
8. References

 https://en.wikipedia.org
 https://www.livemint.com
 https://www.jagranjosh.com
 https://www.ideacellular.com
 https://www.vodafone.com
 http://www.yieldopedia.com
 http://www.trai.gov.in/sites
 http://www.livemint.com/Industry
 https://telecomtalk.info/india-spectrum-data-sheet/134245/