FR11: VODAFONE IDEA POST MERGER ANALYSIS AND

IMPACT ON TELECOM INDUSTY

Table of Contents

BACKGROUND AND MOTIVATION...............................................................................................4

LITERATURE REVIEW......................................................................................................................5
Vodafone-Idea merger: emergence of a telecom giant amidst predatory price wars
(Kittilaksanawong, Kandaswamy The CASE Journal 2018).............................................................5
The impact of Jio on Indian mobile industry: A case study on mergers and acquisitions of idea –
Vodafone and Airtel – Telenor (Satyanarayana, Rao, Naidu 2017)...................................................5
Methods of Valuation for Mergers and Acquisitions (Darden School, University of Virginia).........5
Idea Vodafone India Merger (Investor Presentation, Aditya Birla Group 2017)...............................6
INDUSTRY ANALYSIS......................................................................................................................6
Market Size.......................................................................................................................................7
Trends................................................................................................................................................7
Players in the market.........................................................................................................................9
Porter’s Five Force Analysis............................................................................................................11
Jio Effect.........................................................................................................................................12
COMPANY ANALYSIS....................................................................................................................13
Vodafone India................................................................................................................................13
Mergers and Acquisitions................................................................................................................14
SWOT Analysis of Vodafone India Pre-Merger..............................................................................14
Idea Cellular....................................................................................................................................15
Mergers and Acquisitions................................................................................................................15

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 Idea Cellular Stock Performance.....................................................................................................16
SWOT Analysis of Idea Cellular Pre-Merger..................................................................................17
SWOT Analysis of Vodafone-Idea Ltd. Post-Merger......................................................................17
DEAL ANALYSIS..............................................................................................................................18
Advisors..........................................................................................................................................18
Corporate Structure: Post Deal........................................................................................................18
Idea: Capital Holding Structure Pre Deal.........................................................................................18
Vodafone: Capital Holding Structure Pre Deal.................................................................................20
Holding Structure Post Deal.............................................................................................................20
RELATIVE VALUATION.................................................................................................................21
SYNERGIES.......................................................................................................................................22
Expected Synergies..........................................................................................................................22
Operational Synergies..................................................................................................................22
Financial Synergies......................................................................................................................23
Realized Synergies..........................................................................................................................23
Impact on Consumers......................................................................................................................24
PEST Analysis of the Telecom Industry..........................................................................................25
Future and Insights - What's Next?..................................................................................................28
REFERENCES....................................................................................................................................31

LIST OF FIGURES
1. Trends of Subscribers and Tele-density 6
2. Gross Revenue (US$ Billion) 7
3. Wireless Data Consumption (Terabytes) 7
4. Market Share Pre-Merger 8
5. Competitor Market Share 9
6. Mobile Industry Revenues (in ₹ trillion) 11
7. No. of Vodafone Mobile Customers (in Millions) 12
8.Idea Stock Performance 14
9. Shareholding Pattern post merger 16
10. Capital Structure: Vodafone Idea 16
11. Idea Capital Holding Pre Deal 17

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12. Vodafone Capital Holding Pre Deal 18
13. Holding Structure Post Deal 19
14. Relative Valuation 19
15. Growth fueling FDI 23
16. NDC Policy 2018 24
17. Income shift India 24
18. FDI Inflows Telecommunication 25

LIST OF TABLES
1. Post Merger Rate of Growth 8
2. Industry KPIs 10
2. Mergers and Acquisitions Vodafone 12
3. Mergers and Acquisitions Vodafone 13
4. Recent acquisitions 25

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BACKGROUND AND MOTIVATION
India has the world’s second largest number of telecom subscribers, spearheaded by a
revolution of affordable subscription plans. It has also become the world’s largest consumer
of mobile data due to the ‘Jio effect.’ There has been a systemic shift in the market dynamics
towards a data-centric model from voice-based plans. The opportunity still remains large, as
500 million more internet users are expected to be added in the next decade, helped by low
smartphone costs. Due to competitive prices, there has been immense pressure on legacy
players to reduce costs and improve their offerings. This has led to huge losses in the past few
years and the medium term outlook remains pessimistic. Post the entry of Reliance Jio, the
industry has witnessed a spate of mergers and shutdowns. In present day, only four major
players remain - Vodafone Idea, Airtel, BSNL and Jio. Services like Aircel, RComm have
shut shop. A key metric of the industry, Average Revenue per User (ARPU), has increased
across the board post consolidation as users started paying more for higher volumes of data.

In the recent years, telecoms have also been investing in upgrading their technology
significantly. Govt. policy such as the National Digital Communications Policy, 2018 has
also been conducive to increased investments and better customer service.

LITERATURE REVIEW
Vodafone-Idea merger: emergence of a telecom giant amidst predatory price wars
(Kittilaksanawong, Kandaswamy The CASE Journal 2018)
The paper talks about the entry of Jio into the telecom industry with a predatory pricing
strategy. Following the upheaval caused by this aggressive entry, the second and third largest
telecom providers had to merge to stand their ground. This lead to the formation of the single
largest telecom organisation in India. The paper assumes a critical stand in commenting on
the necessity and success of the merger by exploring synergies. It also explores the effect of
two brands of such size maintaining their brands and possibly cannibalizing each other’s
sales. The paper used theoretical insights from journals and books for the paper. 

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The impact of Jio on Indian mobile industry: A case study on mergers and acquisitions
of idea – Vodafone and Airtel – Telenor (Satyanarayana, Rao, Naidu 2017)
The paper examines the aggressive entry by Reliance Jio into the Indian telecom industry
which lead to a lot of radical changes in the customer consumption, behaviour and competitor
strategies. Jio bared the vulnerabilities of other telecom providers which forced them to resort
to means like mergers and acquisitions to stay afloat in a highly competitive marketplace.
The paper begins with a brief introduction about Reliance Jio and the products they offered at
a price significantly lower than the industry average. It examines the effect of Jio’s entry on
the competitive strategies of other players. It also analyses the major changes that follow in
the telecom sector due to Jio. The paper then looks into the motives behind the two main
mergers that happened: Vodafone-Idea and Airtel-Telenor. The authors perform a Porter’s
Five Force analysis on Reliance Jio to get a better picture of how the post-merger scenario in
the telecom sector looked.

Methods of Valuation for Mergers and Acquisitions (Darden School, University of

Virginia)
The paper reviews different methods used to value firms in a merger and acquisition. It deep
dives into the Discounted Cash Flow model of valuation in particular and compares it with
other methods like book value, liquidation value and market value. DCF uses the present
value of cash flows generated by the firm over its life to compute the enterprise value of the
firm. The paper then explores the concepts of free cash flows, terminal value and discount
rate in the context of the model and provides formula to calculate each one of them. The
paper also answers critical questions like how to incorporate the value of synergies and the
correct discount rate to be used. A detailed example of DCF valuation is also present for lucid
understanding of the concept. At the end, the author focusses on other valuation methods and
discusses their use cases and shortcomings.
Idea Vodafone India Merger (Investor Presentation, Aditya Birla Group 2017)
The Idea Vodafone investor presentation was released to the public on 20 March 2017 by the
Aditya Birla Group. The presentation talked about value propositions for all the stakeholders
involved: consumers, shareholders and the government. It talks about how the merger would
help propel the vision of Digital India and transform India into a digital society. The benefits
offered by this deal to the consumer in the form of better network and connectivity is
mentioned. Shareholders are promised that this merger would give the company an ability to
generate better returns. The partnership with Vodafone is talked about next, how it would
strengthen both the parties in terms of resource pooling. The merger is termed as an “equal
partnership”. The presentation then goes on to talk about the synergies, financials and
financials of the combined entity and how it would make Vodafone-Idea the largest player in
the telecom sector in India.

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INDUSTRY ANALYSIS
Telecom sector in India has witnessed revolutionary growth after Atal Bihari Vajpayee
government formed the National Telecom Policy (NTP) in 1999. From a few million
subscribers, today telecom has grown to stand second in terms of number of subscribers in
the world and the number crossing a billion mark. The growing Indian telecom industry, is
contributing substantially to India’s GDP which is 6.4%, The growth in app downloads in the
past two years can been 165 percent, which proves the shift in terms of usage of phones.
As far as regulations in telecom are considered, they are very liberal which have created a
market place online. The regulations on FDI have also been curbed, making it one of the most
sought out growing sector. According to current stats, India has received US$ 32.45 billion in
FDI during the period from April 2000- December 2018. It is predicted that in the next 10
years, increase in mobile usage and falling prices of internet packages or data will create
additional user base of around 1000 million. This is a huge step towards creating
opportunities of employment and driving business growth. Report by GSMA, suggested that
every 2/3rd transaction will be made by smartphone, boosting India’s contribution in
worldwide sales of smartphones.
With such huge scope, it has not failed to attract interest FDI. The National Digital
Communication Policy 2018 is launched with the goal to raise $100 billion in investments
which would lead to creation of 4 million jobs, it’s an initiative by government of India. The
data by Department of Industrial Policy and Promotion shows that, through FDI US$ 32.45
billion was raised in a span of 18 years. Another policy planned by government is National
Telecom Policy 2018, which aims at attracting US$ 100 billion worth of investments by
2022. National e-Governance plan is one where Department of IT to set up over 1 million
service centres. The limit of FDI has been increased from 74 percent to 100 percent, to
promote rigorous growth and expansion can be done without much budget constraints. 
Internet enabled services are offered in areas such as healthcare and retail.
Due to potential growth in this industry, government is planning to use this technological
advancement towards developing infrastructure such as smart cities and Internet of Things
enables services 
 
Market Size
 
India has achieved a rank of being second in the world calculated basis of number of internet
users which are around 560.01 million. Overall, India’s telecom market is again second in
world, with user base of 1197.87 million subscribers.
There is prediction that over the next five years, penetration of mobile phone with falling data
costs is going to add 500 million new internet users, which in turn will create new
employment avenues.

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Trends
With the CAGR (compound annual growth rate) of 17.44%, telecom subscribers have
reached a record highest number of 1206.22 in the Financial year 2018-19. Tele-density is
number of subscribers per hundred people in India has witnessed substantial growth from
18.3% to 92.84% over the years from 2007- 2018. Even if we consider the data till February
2018, it can be seen that subscriber base and tele-density reached 1,205.40 million and 91.86
per cent. Which is a promising figure to be assured that similar growth trends can be
witnessed in ongoing financial year.

Source: Telecom Regulatory Authority of India

Gross revenue has witnessed growth of 23.21 % from the FY08 to FY18. It grew to US$
25.04 billion between September – December 2018. The predictions regarding revenue
growth are at 7% in FY 2020, owing to control over tariff wars, availability of host of data as
well as talk time plans all at competitive prices.

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 Source: Telecom Regulatory Authority of India

In recent reports and surveys, we have come across data which states that India has become
the highest consumer of data throughout the world. As evident from the below data
consumption pattern, we can conclude that data consumption has witnessed exponential
growth over the quarters. The exact number is 119.00 %, 14,283,256 terabytes between
September-December 2018.

Source: Telecom Regulatory Authority of India

Players in the market

Pre-Merger:

Source: Telecom Regulatory Authority of India

Post-merger:

Subscriber base (millions) Rate of growth (%)

Dec-
Service provider 18 Mar-19 Net additions

Vodafone Idea Ltd 418.75 394.84 -23.91 -5.70985

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 Bharti Airtel 340.26 325.18 -15.08 -4.43191

Reliance Jio 280.12 306.72 26.6 9.49593

BSNL 114.37 115.74 1.37 1.197867

Others 22.502 19.319 -3.183 -14.1454

Source: Telecom Regulatory Authority of India

As evident from the above graph, Vodafone Idea Ltd are leading with a slight margin in
March 2019 with 33.98% of the users using this operator in spite of the fact that it lost 23.91
million subscribers during the quarter. Second was Bharti Airtel with 27.99 % of the total
market share and a total of 325.18 million subscribers. The interesting thing to note here is
that only Reliance Jio and BSNL have showed positive growth in terms of increase of
subscriber base by 26.61 million and 1.37 million subscribers respectively. There was decline
of subscriber base in case of all the other service providers. Below are some standard KPIs:
Vodafon
e Idea
KPIs Ltd Airtel Jio
ARPU(Rs.) 104 123 122
# 3G/ 4G circles 22/22 22/22 NA/22
185/17 NA/24
GSM / BB sites('000s) 273/189 1 9
Optical fiber circle
('000s KM) 250 224 250
GSM spectrum(MHz) 471 349 NA
Broadband spectrum
(MHz) 1429 1140 1235
NA/15
# 3G/ 4G BB carriers 34/129 33/105 0
# of BB carriers 163 138 150

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The industry is moving towards using newer technologies and aspects such as:
1.      5G Networks – People are used to high speed internet. And soon 5G technologies are
going to cause waves, lab a field trails are already conducted by carriers to stay on top. By
2020, 5G is expected to be available to for mass usage.
2.      Secure and reliable services – As more and more services are being offered, security
becomes a major parameter to consider. Modern, secure implementation of technology in
aspects such as biometric SIM cards is used for ceasing crimes related to mobile phones,
terrorist attacks etc.
3.      Artificial Intelligence (AI) – Emerging trends in the field of artificial intelligence
ranges from speech recognition, indoor navigation, digital assistants, network optimization
and orchestration, predictive network maintenance.
4.      Internet of Things – The amount of data generated is huge which in turn provides with
numerous opportunities such as acting as a IoT connectivity service provider, offering
Machine to Machine devices which will open up new sources of revenue. A prediction by
Gartner is that 20 billion devices will be connected by IoT and the business will account to
$300 billion in revenue.
Porter’s Five Force Analysis

Competitor’s analysis:
Competition was always high in the telecom industry due to low switching cost, convenience
and ease of portability and increasing price sensitivity among the service providers. The entry
of Reliance Jio providing services at affordable costs have triggered this competition even
further. Due to initial high capital expenditure to set up cable and wireless infrastructure, exit
barriers are also intense. Due forcing players to stay in the market, increasing the competition
further. Currently, there are only 4 major players who are intensely competing amongst
themselves.
Threat to new entrants:
There are stringent regulations set up by the government adhering to which becomes a fairly
tedious task, which takes down the motivation of a new player to enter the market. The initial

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cost of infrastructure needed to set up services and is high and every player may not be
willing to invest that much. The cost of infrastructure can only be recovered if volume of
customers is on boarded thus achieving economies of scale becomes a mandate.
Substitute Products:
Since, there is no alternative to using telecom services, threat to substitute products is usually
low.
Bargaining Power of Suppliers:
As there are a few telecom equipment suppliers in the market, they have considerable
bargaining power over the service providers. Also the cost of moving from one supplier to
another is also quite high, which makes it a difficult task to switch suppliers.
Bargaining Power of Customers:
Customers are the ones who are benefited in telecom due to multiple options available in
terms of switching operator, which is usually an easy process. Thus, if network quality and
price points do not satisfy the demand of the customers, they usually switch from one service
provider to another
Challenges faced by the industry:
 Technology has graced the telecom sector as well. Nowadays, companies have moved
towards agile configuration of cloud, owning to which there is need of decentralizing
the purchasing and decision power.
 The variety and quality of services provided by the telecom industry is increasing and
due to extreme competition, they have to be made available at competitive prices.
Thus making the profit margins to fall. Various technology vendors have started
offering the services similar to telecom industry, hence it is of essence for the telecom
industry to continuously evolve and adapt the digital transformation.
 Since, process of customer services offering have changed and have become
automated, the technical infrastructure needed to support this is becoming
increasingly complex. Thus increasing the cost of maintenance and skill upgradation.
 With the upgradation in technology and services offered, one important aspect is that
of providing security of networks. So new alternatives and innovations are needed to
offer host of services along with proper security measures.
 Internet of things is gaining traction, which is generating huge amount of data due to
presence of multiple sources of tracking. This in turn is pushing the telcos to handle
the data generated by networks by zettabytes yearly.

Jio Effect
The disruptions caused by Reliance Jio are majorly credited to revolutionizing the Indian
Telecom Industry ever since it first started in 2016. It used VoLTE and unlimited data and
call plans at very low prices to push other players into coming down from what was quite an
expensive bargain when compared to the prices now.
 Entered the market with free sign-up booths all over the country that made getting a
SIM Card easier and faster than ever before.
 Jio also offered free services for all subscriptions within a few months of its launch,
six months of free unlimited calling and data services which meant with the advent of
dual SIM phones people were prodded into at least using them for the free data for the
first 6 months.
 As a result, Jio gained a significant market share of 190 million subscribers which is
18% of the market.

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  This put all the existing players in the market under severe stress to reduce pricing,
even though no matter how low they went it was hard to compete with FREE
specially when the service too was competent.
 The company marketed a 4G phone for a refundable deposit of Rs. 1500 and
unlimited services at just Rs. 153 a month, thus further increasing smartphone and
internet penetration.
 Jio also managed to provide service in areas such as new metro lines and other
strategic locations where other major operators such as Airtel and Vodafone weren’t
already present.
 In the long run, many small players could not sustain or compete at their prices and
were thus forced to close own, leaving the industry with just 6 major players: Jio,
Airtel, Vodafone, Idea, BSNL & RCom.
 Revenue Declines after Jio:

*Consumer-level spending on mobile services, including service tax Source: TRAI, Kotak Institutional Equities
 By July of 2018 itself ARPU – Average Revenue per User had dropped by 42%
 Subscribers: March 2016 (Before Jio): 936 million
         March 2018: 1,202.22 million => Up by 28%

COMPANY ANALYSIS
Vodafone India
Vodafone is one of the largest telecommunications firms in the world and offers a range of
services including messaging, data and fixed communications. It has operations in 17
countries. Vodafone operates mobile networks in partnerships in 49 countries and offers fixed
broadband operations in 17 markets.
Vodafone entered the market in India in 2007 by buying a controlling stake in Hutchinson
Telecom and offers 2G, 3G and 4G mobile technology connectivity. The company though
optimistic at its launch has faced regulation struggles throughout its existence and by 2015
had notched a cumulative £800m in cash losses. On 20th March, 2017 Vodafone Group Plc
and Idea Cellular made an announcement of agreement to combine their operations in India
and as a result created the largest telecom operator in India.

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Source: https://www.statista.com/statistics/241577/number-of-vodafone-mobile-customers-by-markets/

Mergers and Acquisitions

Yea Target Details (Name and Spectrum Circles)

r Company

2000 Essar The company that ultimately became Vodafone India, Hutchinson
Max acquired Essar and entered Calcutta and Gujarat circles

2003 Aircel Hutchinson Max was renamed to Hutch after it acquired Aircel
Digilink Digilink and its circles in Rajasthan, UP(East) and Haryana

2007 Hutch Vodafone acquired a controlling stake of 67% in Hutch and

rebranded it to Vodafone.

SWOT Analysis of Vodafone India Pre-Merger

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Idea Cellular
Idea Cellular originally incorporated as Birla Communications Ltd. In 1996, is an Aditya
Birla Group Company is a cell phone operator in India and provides 3G and 4G telecom
services and wireless broadband Pan-India. In 2018, it was the first to launch VoLTE service
across 20 4G circles in India and had 196,458,174 subscribers as of December 2017. It was
also the 3rd largest operator in India and ranked No.7 Operator in the World by number of
Subscribers.
As of January 2018, the company had 31,700 distributors, 1.4 Million Transacting Retailers.
1.2 Million Data Selling O/Ls, 650 Idea Service Stores across formats as well as Call Centres
across India supported by a large no. of agents. Idea also owns a range of Digital
Applications such as Idea Games (~2mm downloads), Idea Music (~5.5mm downloads), Idea
Movies and TV (6.4mm downloads and 2 million daily minutes of video viewing. Their
digital wallet Idea Money has 13mm+ subscribers and Idea Digital Sales and Service App
had over 27mm installations.
Mergers and Acquisitions

Yea Target Company Details (Name and Spectrum Circles)

r

1996 AT&T Company Name changed to Birla AT&T Communications

Limited (Incorporated in 1995 Birla Communications
Limited)

2000 Tata Cellular Ltd. Merged with Tata Cellular Limited to acquire license
to operate in Andhra Pradesh Circle.

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 2001 RPG Cellular Limited Merged and acquired license to operate in Madhya
Pradesh and Chhattisgarh

2004 Escotel Mobile Renamed to Idea Mobile Communications Limited

Communication Limited post acquisition and reached 4 million subscriber
mark.

2006 Escorts Became part of Aditya Birla Group and renamed as

Telecommunications Idea Telecommunication Limited
Limited

2008 Spice Communications Acquired Spice Communications to gain access to 10

more circles, and in 2009 became a pan-india
operator

2018 Vodafone India Merged to form Vodafone Idea Ltd. With biggest
market share.

Idea Cellular Stock Performance

Idea’s stock price rose sharply in the lead up to the official announcement on 20/3/2017. But
the company’s fortunes have been hit hard by the intense competition that has seen revenues
take a severe hit. And was we can see from the graph the competition due to Jio has been so
severe that prices have been continuously dropping since 2018 though until the merger the
hope of it had kept Idea’s stocks pretty high.

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SWOT Analysis of Idea Cellular Pre-Merger

SWOT Analysis of Vodafone-Idea Ltd. Post-Merger

Capital
Shareholding
Structure:
pattern
Vodafone
post DEAL ANALYSIS
Idea
merger The deal between Vodafone and Idea was
Equity
Idea &
Shareholders
Reserves Secured
Vodafone
Loans approved by the Mumbai bench of NCLT on 30
Aditya Birla Group August 2018. The deal was termed as “merger of
equals”. The swap ratio decided by the two
companies was 1:1, which meant that the
26% 29%
37% shareholders of Idea could swap one share for one
share of Vodafone Idea. The mergers of equals

63%
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45%
also meant that both the entities had to have equal stake in the merged company. The
following chart represents the shareholding pattern and capital structure after the merger.

The unequal stakes meant that Aditya Birla Group had the right to 9.5% of Vodafone’s stake.
If Aditya Birla Group is unable to acquire this additional stake, Vodafone would be forced to
sell it to the public shareholders as per the terms of the deal.
Advisors

The Vodafone group was advised by Robey Warshaw and Morgan Stanley about the
financial aspects of the merger. They were the lead financial advisors. Bank of America,
Merrill Lynch, Kotak Investment Bank, Rothschild and UPS were also the financial advisors
for the deal. Idea was advised by Goldman Sachs about the merger.
Corporate Structure: Post Deal

The new entity of “Vodafone India” has 12 directors, 6 each represented by Vodafone and the
Aditya Birla Group. The chairmanship of the firm was offered to Mr. Kumar Mangalam
Birla.
Idea: Capital Holding Structure Pre Deal

Promoters Public

42.45% (1) 57.55%

Idea

100% 49% 100% 100% 100% 100%

ABTL ABIPBL ICISL ICSL ITL IMCSL

11.15%

Indus Towers

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 Source: Idea Investor Presentation January 2018

1. Aditya Birla Telecom Limited (ABTL) held 11.15% stake in Indus Towers and was
involved in the business of sale and purchase of communication devices.
2. Idea Cellular Infrastructure Services Limited (ICISL) owned all the tower assets of
Idea.
3. Idea Cellular Services Limited (ICSL) fulfilled the manpower demand of Idea.
4. Idea Telesystems Limited (ITL), similar to ABTL, was engaged in the business of
sale and purchase of communication devices.
5. Idea Mobile Commerce Services Limited (IMCSL) provided mobile banking related
services and digital wallets.
Vodafone: Capital Holding Structure Pre Deal

Source: Idea Investor Presentation January 2018

1. Vodafone India Limited looked after the Mumbai circle operations. Vodafone Mobile
Services Limited was responsible for all other mobile circles.
2. VMPL operated the digital wallet business and MCSL handled trading in handsets,
data cards and related accessories.
3. Vodafone Foundation was the CSR arm of the firm

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 4. Firefly Networks was a JV between Vodafone and Bharti Airtel to provide Wi-Fi
hotspots.

Holding Structure Post Deal

Source: Idea Investor Presentation January 2018

1. Aditya Birla Group acquired 4.9% stake of the merged entity from Vodafone in
accordance to the 1:1 deal structure for INR 39 billion
2. Aditya Birla Group has the right to acquire up to 9.5% shareholding from the
Vodafone Group after 4 years of the deal, i.e. 2022

RELATIVE VALUATION
We used the relative valuation method to value Vodafone-Idea post-merger. This was done
due to the following factors:
 Cash flows were observed to be negative for the firm
 We used valuation multiple of EV/Sales. The negative earnings of the firms meant
that using P/E multiple would not have given the true picture of the value
 Many telecom companies were observed to have positive EBIT but negative EBITDA
due to high depreciation costs, the negative values were not conducive to using these
multiples

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 Market Data Financial Data Valuation
Price Market Cap EV Sales EBITDA EBIT EV/Sales EV/EBITDA EV/EBIT
Company Name (₹/share) (₹Cr) (₹Cr) (₹Cr) (₹Cr) (₹Cr) x x x
Bharti Airtel 339.9 1,74,402 2,16,643 49,608 15,357 270 4.4x 14.1x 802.4x
T ata Communications 466.35 13,290 17,660 5,389 651 -239 3.3x 27.1x -73.9x
T ata Teleservices 3 586 13,068 1,277 1,063 886 10.2x 12.3x 14.7x
MT NL 6.51 410 19,750 1,987 -704 -1,687 9.9x -28.1x -11.7x
Min 3.3x -28.1x -73.9x
Max 10.2x 27.1x 802.4x
Average 7.0x 6.4x 182.9x
Median 7.2x 13.2x 1.5x

EV of Vodafone Idea, Actual (in ₹Cr) 123594

EV/Sales (industry avg.) 7.0x
Sales (in ₹Cr) 36766
EV of Vodafone Idea, Calculated (in ₹Cr) 255681

We observe that the calculated enterprise value of Vodafone Idea is 2x the actual enterprise
value. This means that the market has undervalued the stock and we can expect it to rise in
the future. An important point to note here is that this multiple does not take in account the
expenses incurred by the company, which eat away a big part of the revenue in the telecom
industry, owing to the high depreciation and taxes involved.

SYNERGIES
Expected Synergies

Operational Synergies
Operational synergies are realized when the combined firm saves on costs which would’ve
been higher (in total) in individual smaller firms. As a result of the merger, it was expected
that the industry competitiveness would decrease as the fight for market share would see one
less player. This was expected to decrease pricing pressure and lead to slightly
better operating margins. It was also believed that due to the huge size of the ensuing firm,
there would be greater economies of scale and better bargaining power with suppliers. It was
anticipated that the huge infrastructure base (networks, towers, stores etc.) would also prove
to be valuable assets which could be disposed-off when needed.

At the time of the merger, a joint statement from Vodafone and Idea noted, “The merger is
expected to generate Rs 14,000 crore annual synergy, including OpEx synergies of Rs 8,400
crore (60% of savings) , equivalent to a net present value of approximately Rs 70,000 crore
(~USD 10 billion).” At the end of June 2018, net debt stood at Rs 1,09,200 crore (~USD 16
billion).

Significant operational synergies were expected to kick in starting FY 2020-21. Initial merger
costs were estimated to be around Rs. 13,300 crores to integrate the networks and
organizations. With the large customer base making calls within the network, the company
was expected to save on the network access charges. If the gains were on 35-40% of the

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outgoing calls, the savings were expected to be around 10-12% (INR 5-6 billion).

Post the merger, it was expected that due to an improved spectrum portfolio, the subscribers
per network site metric would increase to that of Airtel’s level and network savings of 7-17%
would be realised. The better combined spectrum footprint was also supposed to provide a
more equal footing with Jio’s and Airtel’s data offerings.  A report at the time of the merger
noted that Vodafone Idea Ltd. had 73,000 overlapping sites and removing overlapping 3G/4G
equipment would lead to power savings. The management was confident it could save INR
62 billion in this manner. Equipment could also be used to service additional spectrum after
paying a license fee. Eliminating redundant network sites (~20%) through rationalisation of
tower tenancies, savings in operating expenses by around 15-20% were expected.

Analysts estimated a cash burn of Rs 4,000 crore per quarter for the new entity which was
expected to last about five quarters, until more funds were raised to fund future investments.

In terms of customer acquisition & servicing costs, synergies were expected by shutting down
excess service centres, back offices and expanding distribution networks to make them more
effective. IT Infrastructure and advertising costs were also areas identified where costs could
be reduced.

General and administrative costs were to be reduced by cutting down the duplication of
expenses in finance, legal and marketing domains and centralising them.

Financial Synergies

The companies incurred heavy expenditure to expand 3G/4G network footprint leading to
huge debt levels. However, intense competition and declining ARPUs and ARPMs had made
their debts unsustainable. It was predicted that Vodafone and Idea would leverage their
improved balance sheet to become competitive again and raise capital easily in the future by
using capex synergies to contain debt levels. Total financial synergies starting from the fourth
year were estimated to be INR 56 billion per FY (40% of savings).

Before the merger, Idea and Vodafone individually operated at EBITDA margins of 20%
which were much lower than Airtel’s 30% and Jio’s target of 50%. Post-merger, the
combined entity is expected to have long term EBITDA margins of 26%, an improvement,
while still being quite below its competitors.

The merged entity was expected to sell excess assets and realize synergy benefits to reduce
leverage and bring down the net debt/EBITDA ratio to 3 from then existing ratios of 4.6 and
4.3 respectively.

Realized Synergies
Recent reports indicate that the management is hopeful that it’ll realise Rs.84 billion of
targeted run-rate costs synergies by FY21, two years ahead of the initial target set at the time
of the merger announcement in March 2017. At the current run rate, annualised synergy
realisation is at ~ INR 51 billion, ~60% of the INR 84 billion OpEx synergy target.  Net debt
stood at ~1.18 lakh crore after Q4FY2019.

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The company continues to integrate its networks on a war footing. Customers can now access
a unified network experience across WB, AP, Haryana, MP, HP, Assam, North East, J&K ,
Bihar, Punjab and NCR - East. This was possible due to consolidation of spectrum and the
radio access network. Post integration, the capacity in these circles has increased by approx.
34 per cent, leading to improved Net Promoter Score and higher download speeds.

In other circles, network integration is progressing on a cluster-by-cluster basis. Further, the

company has enhanced capabilities of some of their 900MHz sites to provide 4G service
through dynamic spectrum reframing in Kerala and Delhi.

They have also removed surplus equipment on 24,000 sites out of the total 67,000 co-located
sites. The company has also exited approx. 9,900 low utilization sites. Both initiatives have
yielded significant cost savings for the company.
On the operational side, they have finished the integration of distributors, retailers, service
stores and service centres. To deliver further cost savings, they’ve signed a multi-year
agreement with IBM for deployment of future-fit technologies including Cloud, Advanced
Analytics and Business Intelligence.
The integration of distribution channels has resulted in less than half of residual distribution
as the company now follows single tier distribution approach of Idea pan-Idea vs. two tiered
approach of Vodafone in rural areas. The retail outlets have also been consolidated with
company retaining better of the two outlets in geographical areas.

IMPACT ON TELECOM INDUSTRY

Impact on Consumers

With Vodafone and Idea merging together to become the leading mobile connectivity
services provider in the country, consumers can expect several benefits being passed on to
them, in terms of better quality of services, competitive offers, new technologies, etc. 

1. Better services: The company claims that post-merger, they will have over 200,000
unique GSM sites and has 235,000 kilometres of fibre to cover over 1.2 billion Indians
implying they will be able to cater to 92% of the country's population. 

2. Better consumer experience: The consumer services network will also be very
strong for the group as both the companies operated their individual retail stores and service
centres before their merger and will now almost double their network leading in better service
experience for users

3. New technologies: Since Vodafone is a global telecom giant, and has expertise across
new technologies like 5G, IoT, etc. it can use its global exposure to bring those technologies
in India, which is a major market for all network providers. So, Vodafone's tech-expertise,
coupled with the scale at which Vodafone Idea group operates, will make it easier for the
newly-formed entity to launch these services across the country more efficiently and quickly

4. Competitive offers: The consumers already had strong individual financial backing,
and now post-merger, with Idea infusing INR 6750 crores and Vodafone putting in around
INR 8600 crores, the group will have a strong cash balance of around INR 19300 crores (post

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deductions for Dept. of Telecom, Government of India). Thus the merged telco will be in a
position to get into a price-war against the aggressive pricing strategy being adopted by
Reliance Jio

5. New markets: Additionally, post their merger, the two companies are currently
operating as independent operators, but have been able to launch their services in areas, they
were earlier missing out on. For example, Idea is now able to cater to the consumers in the
city of Kolkata, riding on Vodafone's infrastructure, and similarly Vodafone has also
enhanced its network coverage in certain areas on which it was earlier missing out on. The
customers in these areas will now have an option to avail the new entrant's services and might
also get launch offers from these operators, as they enter the new market.

6. Increased stability: The Indian telecom industry operates at extremely thin margins
which has made it difficult for the telcos to further lower the prices of their services, and now
with just three major private companies and a public operator, dominating the market, the
prices and the network standards are expected to head towards stability which will push the
companies to focus on future technologies like 5G, MIMO, etc. to drive growth in coming
years

7. Probable network issues: While the industry analysts expected that, post-merger, the
Vodafone Idea group will be able to deliver better network coverage, but on the contrary,
customers are facing network outage issues such as call drops, etc. across multiple circles.
This was also predicted in a Bank of America-Merrill Lynch report, which stated that if the
two companies look to cut down the number of sites post-merger, they will risk deteriorating
network coverage. Vodafone and Idea are cutting infrastructure in overlapping circles to save
energy/cost, which is leading to network issues in these areas. However, the Company has
denied all such claims, stating that the call-drop issues have dropped by around 15% post-
merger

PEST Analysis of the Telecom Industry 

The telecom industry in India is blooming, as the internet and smartphone penetration is
increasing in the country leading to a higher demand for connectivity services, which coupled
with government support has resulted in increased Foreign Direct investment, eventually
helping the industry grow at double-digit rates 

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Political: The Indian government is extensively supporting the telecom industry in the
country, with its 'Digital India' initiative, under which GoI is pushing for digital payments,
digitization of various governmental organizations, etc. which will lead to an uptick in the
demand for data and telecom services on user devices. The government has also come out
with several policies to benefit the telecom industry stakeholders such as: 
- In 2015, TRAI (Telecom Regulations Authority of India) laid regulations for ensuring
better and effective compliance with the quality of service regulations and to protect the
interest of the customers
- In Aug 2017, TRAI also regulated that the call drop rate should not be more than 2%
for any operator, ensuring better quality of the services
- In 2018, TRAI also set the operators free to offer any sort of discount on their
services, so the services providers did not have to worry about complying with the
competition laws of the country
- Department of Information Technology has shown intentions to setup over 1 million
internet-enabled common service centres under its National e-Governance Plan
- The government has also started hosting 'Indian Mobile Congress' where it invites
delegates from all across the globe including delegates from leading tech giants like
Samsung, Apple, Intel, Ericsson, Nokia, AT&T, etc., aiming to increase the exposure of local
players to the international advancements in the telecom space 

Source: National Digital Communications Policy, 2018

Economical: Being the fastest growing economy in the world, the telecom industry expects
huge gains in terms of its subscriber base as well as in its ARPU as the internet penetrates the
rural markets of the country, coupled with the following factors:
- The disposable income of families is on a sharp increase across all income groups and
is expected to continue rising, given the strong growth prospects of the economy
- GPD/capita is expected to increase at CAGR of 7.5% from $1482 in 2012 to $3274 in
2023, which is likely to be a key determinant for the growth of Indian telecom sector

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- The inflow of cheap smartphones (<$80) in the country has further boosted the
penetration of smartphones, further pushing the demand for data services 
- The Indian Mobile Value Added Services (MVAS) industry is expected to row at a
CAGR of 18.3% during the period 2015–2020 and reach US$ 23.8 billion by 2020
- Further, telecom has been a major recipient of the Foreign Direct Investment coming
to India, as telecom alone, accounted for nearly 8% of the total FDI in the country
- During the period of 18 years, till 2018, the FDI inflows in the telecom sector was
around $33 billion, bringing in the leading global telcos to India, which would help the
country get their advanced technologies like 5G sooner

Target Acquirer Acquisition price (US$ million)

Bharti Airtel Singtel (2018) 411.02

Bharti Airtel Qatar Foundation Endowment (2014) 1,260

Bharti Airtel SingTel (2013) 302

Vodafone India Vodafone International Holdings 1,641

Ltd (2014)

Social:  The demographics of the Indian market are such that the mobile subscriber base is
expected to increase rapidly with mass adoption in rural areas, with a steep rise likely in the

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internet consumption throughout the country, making it an ideal time for telecom operators to
capture a significant market share, at the time of industry blooming
- The middle class is emerging as an affluent customer base for the industry especially
due to the mass adoption of smartphones at young ages 
- Also, services like bill payments, utilities payments, etc. has boosted the value
proposition of smartphones and internet in general
- Rural wireless tele-density in the country increased to 58.48 per cent by October 2018
from 50.88 per cent as of March 2016
- Number of broadband subscribers reached 496.12 million at the end of October 2018

Technological: Due to a huge user-base, the Indian telecom industry has suffered to offer
high data speeds, due to the congestion and density of users on the network, thus 5G (which
can handle 10x more density than 4G) is a significant upgrade that the Indian consumers are
looking forward to, along with other technologies like standardization of optical fibre based
internet, emergence of IoT and smart home technologies, smart cities set up, etc. 

Since Vodafone and Idea were already operating at a national scale, and now with the merger
of the two operators, they have the best-in-class infrastructure to actually capitalize on the
unique opportunities that the Indian market offers. So, while the group will face tough
competition from local players like Airtel and Jio, Vodafone Idea group has a strong chance
of emerging as a leader in the telecom sector, due to its expertise from global operations, and
its possession of the biggest infrastructure and strong financial backing. 
While the economic and social policies will stay the same for all the operators, the Voda-Idea
merger has set the foundation for an evenly poised three-way competition in the Indian
telecom industry, especially at the onset of fifth-gen connectivity

Future and Insights - What's Next?

There’s a huge amount of money invested in telecom sector. Vodafone Idea Ltd and Bharti
Airtel raised issues worth Rs. 50,000 crore and Rs. 7000 crore by medium of foreign currency
perpetual bonds. By the sheer size of money raised, paucity of funds is a long gone concern at
least in short term for the mentioned telecoms. It also highlights the interest and expectations
investors have from even a troubled sector like telecom which was previously largely
dependent on debt funding. The recent round of funding has given the two telecoms of
chance to bounce back from the disruption caused by Jio.
Airtel had infusion of equity in February 2019, when Singtel (which effectively owns 35.2
per cent in Airtel) invested Rs 2,649 crore in Airtel's parent Bharti Telecom through
preferential allotment of shares. Vodafone Idea - which was formed in August 2018 when
Idea Cellular and Vodafone India merged. As we know, telecom is a highly competitive
market and for companies to thrive huge amount of capital is required.  Vodafone Idea posted
a net loss of Rs 14,604 crore in 2018/19 - its third consecutive year of registering losses.
Airtel's profitability, too, is under pressure though it has managed to remain profitable. The
other major reason for telecom industry to remain optimistic is faith in investors who have
raised the amount which is more credit worthy than parent company infusing funds.
Vodafone Idea is reportedly using 75 percent of the raised capital to repay debt and Airtel
will use for capex debt repayments.

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Airtel has spent close to Rs 48,000 crore in capex over the past two financial years, and its
rival Vodafone Idea plans to invest some Rs 20,000 crore in networks over the next year.
With this rate of spend, need for capital will soon be felt.
Alternative methods of raising money:
·      Legacy telecoms are looking for selling stake in towers and other fibre assets to raise
more capital.
·      Plan to use infrastructure investment trust to pare debt.
·      Quality of services provided have become a major USP in telecom since limited pricing
differential and slowing down of
·      Airtel is looking planning launch a IPO for the Africa unit priced at $1.25-billion, which
would also serve the purpose of reducing debt burden
Airtel has been in talks with Vodafone Idea to form an infrastructure investment trust with all
their combined optic fibre assets. A similar model is being followed by Jio which has two
trusts - Reliance Jio Infratel and Jio Digital Fibre - that own most of Jio's fibre and tower
assets. At the end of March 2019, Airtel's net debt stood at Rs 1.08 lakh crore, and Vodafone
Idea's net debt at Rs 1.18 lakh crore. The capital requirement will continue to grow due to
future innovations, proposed expansion of 5G which is again going to cause strain on cash
reserves and hence should be handled with prudency.
 
Jio has reached 306.7 million subscribers and revenue market shares of 31.7 percent in a
matter of 3 years. Revenue market share by Vodafone Idea is 32.2 per cent, and Airtel's 27.3
per cent and Jio has intentions of capturing more than 50% market share and the affordable
offering are to be continued unless the goal is met.
As per brokerage Motilal Oswal Securities, if we consider by geography Jio is 16 out of 22
telecom circles. Bharti is leader in only Karnataka circle and Vodafone Idea in the remaining
five circles. Apart from this, interconnect usage charges have been reduced from 14 paisa to 6
paisa which in the past contributed significantly to the revenues of telecoms.
Then, the 5G auctions scheduled for the end of the year is going to punch a hole in the
financial condition of Airtel and Vodafone Idea. "5G is a distant future from strategy
perspective of older telcos. They are yet to monetize investments in 3G/4G. Their primary
goal is to convert voice users into data. Airtel is tying up with large content providers to
fasten that shift. Still, I think it's going to take 3-4 years for the conversion to happen," says
Tarun Pathak, associate director at Counterpoint Research adding that more than 50 per cent
of telecom subs are predominantly voice users.
TRAI have mentioned the reserved price to be Rs 492 crore per MHz for a Pan-India
minimum block of 20MHz in the 3300-3600 MHz band. And Airtel and Vodafone Idea are of
the opinion that prices for 5G spectrum are incredibly high. Due to its high cost, many
analysts are of the opinion that major players will wait to check customer response to the 5G
speed and then decide on entering the market. On the contrary, Jio is expected to enter the
industry aggressively and try to capture as much customers as possible

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In March 2019, Airtel and Vodafone Idea reported a drop of 15.1 million and 14.5 million
subscribers where rival Jio added 9.4 million users. This can be attributed to ARPU
increasing strategy where minimum recharge plans were implemented. By this Vodafone
Idea's ARPU surged to Rs 104 in the March quarter compared to Rs 89 in the previous
quarter. Airtel's ARPU for the March quarter was Rs 123, up from Rs 104 in the previous
three-month period.
The journey of telecom sector can be said to have reached a plateau in terms of stability and
increase in APRUs can be said to indicate that the Jio's impact is weakening. The highest
USP will be network quality since the subscriber base and pricing options have already been
tried and there is sufficient saturation rising in them. From the data available, Bharti and Jio’s
network capability is comparable and of good quality while Vodafone Idea will likely require
another 3-4 quarters to stabilize its network in the top 15 circles. Once network capability is
explored and optimized, ARPU is the metric which will be under study since it mainly drives
growth and profitability
During the initial days for Jio although there were murmurs regarding it’s disruptive nothing,
the extend of it was not thought about. The recent funding raised by Airtel and Vodafone Idea
is a new hope for these telecoms to bounce back in the game and make their mark.
The consolidation of players in the telecom industry was viewed favourably by most
stakeholders. At the time of the announcement of the Vodafone Idea merger in 2017, the
CEO of Airtel had welcomed the move, considering the telecom industry is capital intensive
with multiple players. Similar views were echoed by the then Telecom Secretary as well. The
general consensus was that a few solid players are always better for an industry, as they can
make substantial investments and offer quality products and services to customers in a
sustainable fashion. In a mature market, capital and resources can be deployed more
efficiently by the sector unlike when there are a dozen players
The merger and its timing indicated that players in telecom industry recognized the nature
and size of the challenge posed by Reliance Jio and its disruption before the bloodbath. They
took steps to increase their competitiveness to combat the onslaught of pricing pressure.
RComm’s Anil Ambani had commented on the headwinds facing the mobile sector in
September 2018. He predicted that the sector was rapidly moving towards a situation of
oligopoly or even a monopoly.

The aftermath of the merger saw Airtel losing its top spot in revenue share and subscriber
share. Urban internet penetration on mobiles reached almost ~98% while rural penetration
still remains a challenge. However, rapid progress is being made on this front.
In FY17, the telecom sector employed about three lakh people directly and indirectly at tower
firms and operators. The present strength is around 1.8 lakh. Vodafone and Idea individually
had around 25,000 employees before the merger. However, the latest reports indicate a
strength of 14,000 in the combined entity.

In FY2020, the telecom sector is set to turn into a net hirer after a virtual hiring freeze over
the past couple of years. The ongoing efforts to help with network digitisation and preparing
for 5G, have led to telcos targeting companies such as Microsoft, Google, TCS, HCL
Technologies, Ericsson and Nokia for recruitment. The current demand from companies is for

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highly specialised skill sets in the junior to mid-level hierarchy with around 2-5 years of
experience.
In rural and semi-urban markets which were largely voice markets, Jio has surged ahead by
bringing in cheap feature phones that can use data services for entertainment. In a recent
industry conference, Mr. Mukesh Ambani had remarked. “For several Indians, the phone will
be their first camera and television screen.” There is also a greater focus on building an
ecosystem of value added services like TV apps, music streaming, OTT content etc. Airtel
TV and Jio TV have been very proactive in this regard.
In the telecom infrastructure space, firms have been selling in an effort to reduce debt and to
have deeper pockets ready for the market battles ahead. Airtel sold 10.3% stake in its mobile
tower arm Bharti Infratel to a consortium of FIIs for $947 million. This was followed by
another 11.32% stake sale.
Indus Towers, the world’s largest telecom tower company with over 120,000 towers, which
was owned by Airtel (42%), Idea Cellular (11.15%), Vodafone (42%) has seen Airtel
becoming the majority (84%) owner after its acquisition of Vodafone’s share.
RCom, before winding up operations had sold its tower division to a Canadian firm for $1.7
billion. This comes as attempt to reduce debt and to be have ready cash for future avenues.
As analysts increasingly look at ARPU, the Idea / Vodafone combine, which struggled with
the metric shed its subscriber base from 400 million+ to around 330 million to boost the
figure. In the long term, customer acquisition at Vodafone Idea will have to happen at a much
faster pace to compensate for these lower ARPUs.

The addition of 4G subscribers at around 4 million per quarter isn’t sufficient to make a dent
in the bottom line.  The company has to take a relook into its attractiveness to new customers
vis-a-vis its value proposition in terms of better service and plans - especially compared to
Airtel.

Data volume remains high compared to Jio - recent reports indicate 2.9bn GB consumption
for Vodafone vs Jio’s ~ 1.06bn GB. The company has to leverage this to attract more
customers while focusing on network efficiency.

Debt remains high and delayed merger synergies, despite proclamations of early realisation,
have eaten into expected synergies. Cash burn has also necessitated future rights issues. The
company needs to focus on getting merger synergies as soon as possible to save on costs.
The merger was not able to increase the investor confidence in the company, which was
observed by the continuous fall in the stock price post-merger, from Rs 70 in 2017 to the
current levels of Rs 9. Although the valuation states that the company is undervalued, the
high cost economics of telecom industry skews the multiples to gain a clear picture.
With government preparing for auction of 5G spectrums in December this year, all the
players have come under a lot of financial stress, given that the industry was already cash-
strapped.

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