Original Article

Vodafone and Idea Merger: A Global Business Review

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Shareholder’s Dilemma © 2020 IMI
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DOI: 10.1177/0972150920934256
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Roshan Raju1 and Gita Madhuri1

Abstract
In the month of May 2019, Ms Priya Vaidehi who works as a chartered accountant in a small firm
in the city of Pune was pondering about her personal investment. While surfing on social media on
the sunny hot afternoon of 2 May 2019, she came across the news of the biggest merger deal in the
Indian telecom sector. The news was about how Britain’s Vodafone Group merged its Indian subsidiary
with Idea Cellular, to create the country’s largest telecom firm. They mentioned how the combined
entity will accelerate the pan-India expansion of wireless broadband services and also expand financial
inclusion through mobile money services. Since the merger, the network has an outreach of 92 per
cent of population of India.
Ms Vaidehi planning for her future investments narrowed down her investment search to do a
deeper analysis of the merger of two telecom giants Vodafone and Idea. The Indian telecommunication
market has a subscriber base of 1.20 billion and is rapidly growing. The country’s wireless subscriptions
has witnessed compound annual growth rate (CAGR) of 19.62 per cent to reach 1,183.41 million
in the year 2018. Over the past few years, from the announcement of merger to the declaration of
completion of merger, she has noticed that there has been volatility in the share price of Idea Cellular.
Though the subscriber base of Vodafone, Idea’s is around 400 million, and sales had gone up 53.5 per
cent in the third quarter of FY 2018–2019, but the share price had been plunging to an average fall of
14 per cent. She was in deep thought whether she should invest in buying the shares of Vodafone Idea?
Will her instinct help her or the knowledge of financial markets aid in taking the right decision?

Keywords
Shareholder, financial performance, ratio analysis, Vodafone and Idea merger

Disclaimer: The authors wrote this teaching note as an aid to instructors in the classroom use of the case Vodafone and Idea
merger: A shareholder’s dilemma. This teaching note should not be used in any way that would prejudice the future use of the case.
1
Kirloskar Institute of Advanced Management Studies, Pune, Maharashtra, India.

Corresponding author:
Roshan Raju, Kirloskar Institute of Advanced Management Studies, 56/357, Near Tata Foundry Maval, Village Dhamane, Taluke Maval,
Pune, Maharashtra 410506, India.
E-mail: roshenraju@ymail.com
2 Global Business Review

Learning Objectives

●● to evaluate the strengths, weakness, opportunities and threats of the Vodafone idea merger;
●● to analyse the financial performance (financial statements and ratio analysis ) of the investment
target;
●● to evaluate the Vodafone and Idea merger and its impact on the share price; and
●● to understand the impact of merger and acquisition on operating efficiencies of the organizations
involved.

Case Prelude
On 2 May 2019, sitting in her office in the suburb of Pune, Ms Priya Vaidehi came across news about
how Britain’s Vodafone Group merged its Indian subsidiary with Idea Cellular, to create the country’s
largest telecom firm. India has over 1.418 billion subscribers, making it the world’s second-largest
telecommunications market. During the initial announcement of the merger between Idea Cellular and
Vodafone, the Aditya group company in their disclosure to National Stock Exchange (NSE) and Bombay
Stock Exchange (BSE) had mentioned that they propose the merger of Vodafone India limited (VIL) and
Vodafone media services limited with Idea Cellular on 20 March 2017, filed with National Company
Law Tribunal (NCLT), and the merger became effective from 31 August 2018. Now, Vodafone Idea can
take on other major players in a fiercely competitive telecom market.
Since the merger, the network has an outreach of 92 per cent of population of India. For the quarter
ending of Dec 2018 (3 QFY2019), net profit was up by 292.7 per cent (YOY), but share prices have
changed from ₹84.7 last year to ₹29.8 in 2019. She was contemplating on investing her hard-earned
money in the shares of Vodafone Idea. She read that the company had registered a loss of 64.9 per cent
compared to last year (Moneycontrol.com, 2018).As a chartered accountant, she always made investment
in number of shares, but only few had given her good returns. With heavyweights like Bharti Airtel and
Reliance Jio giving a cut-throat competition to Vodafone Idea., will her decision to invest in Vodafone
Idea pay off? Will this be a good investment?

Indian Telecom Industry Landscape

In the past decade, there has been a rapid growth in the Indian telecom sector. The demand by the
consumers has been on the rise and the policies of the Government of India have been instrumental
(Kathuria, 2000). Also, the deregulation of Foreign Direct Investment (FDI) norms to 100 per cent from
74 per cent has been critical for the growth of this sector. Consumers are able to utilize the telecom
services at very affordable prices as the government has a fair and proactive regulatory framework. It has
also enabled an easy market access to telecom equipment (Exhibit 1).
According to the study conducted by Ranstand India, the Indian telecom sector will be crucial in the
generation of employment. By 2020, this sector is expected to generate around 4 million jobs, mobile
subscribers are estimated to reach 1 billion and revenues are expected to grow to US$ 26.38 billion. The
report submitted by GSM Association (GSMA) in collaboration with the Boston Consulting Group
(BCG) stated that there was a rise of 215 per cent in the number of app downloads since 2015. The
government had come up with the National Telecom Policy 2018 with the main aim to increase
Raju and Madhuri 3

penetration in rural areas. The policy also envisaged on attracting investments worth US$100 billion by
2022.The rapid technological development in this sector had contributed substantially to India’s gross
domestic product (GDP) (Indian Brand Equity Foundation, 2018).

Vodafone Ltd.
On 1 January 1985, Vodafone had started their operations in the UK, and, today, they are spread across
the globe with more than 500 million customers. A small operator in Newbury now operates in around
30 countries and partners with networks in over 50 more nations. The company provides a number of
voice and non-voice services to its customers. They earned 62 per cent of their total revenues from
Europe and 32 per cent of total revenues from Africa, Middle East and Asia Pacific geographical areas.
Before the merger with Idea, Vodafone operated in India under the aegis of Vodafone India and was a
significant portion of the Africa, Middle East and Asia Pacific businesses (Vodafone, 2020).

Idea Cellular Ltd.

It was in the year 1995 that Idea Cellular was incorporated, with its earlier name being Birla
Communication Ltd., which was changed to Birla AT&T Communications Ltd. the following year
(Banik & Nag, 2016). Later in the year 2002, the name of the company was further changed to Idea
Cellular Ltd. They provided pan-India integrated wireless broadband services, offering 2G, 3G and 4G
services .It was listed on the NSE and the BSE in India (Business Standard, 2019).

Vodafone Idea Merger

A global provider of telecommunication service and an Indian telecommunication provider with their
merger have created a new entity, a behemoth in Indian telecom industry, of US$23.2 billion enterprise
value. Vodafone Idea Ltd. will be jointly and equitably controlled by Vodafone and Idea.
Disruption has been the new mantra in the technology-driven world in this twenty-first century. The
disruptive entrant in the telecom industry has been Reliance Jio supported by a large chunk of licenses
and backed by the Indian billionaire Mukesh Ambani. It has not only rattled the telecom industry with
cheap rates and tariffs, free calls and data plans but also was able to add a 100 million subscriber base
within 6 months of entering the 4G spectrum market in September 2016.The response of incumbents was
only consolidation, and companies like Etisalat have left the industry due to hyper-competitive pressures.
One of the largest telecom players, Idea Cellular responded to this pressure by proposing a merger with
the Vodafone Group (Idea Cellular, 2019).
The merger has created India’s largest network with 408 million subscribers and around 41 per cent
share of the industry revenue. Bharati Airtel generates around 36 per cent revenue with 268 million
subscribers, closely followed by Reliance Jio with 100 million subscriber base (Exhibit 2). Vodafone
Idea Ltd. has the largest voice network of over 2,00,000 unique Global System for Mobile GSM
Communication sites, giving coverage for over 1.2 billion Indians—approximately 92 per cent of the
population (Economic Times, 2018).
4 Global Business Review

Merger Deal Structure

To understand the overall deal Ms Priya Vaidehi looked up on excerpts from the Vodafone Idea annual
report 2017–2018 and other websites (Exhibit 3).
Vodafone and Idea agreed to merge their operations into Vodafone Idea Ltd. with a share swap ratio
of 1:1. The merger, from the beginning of proposal and announcement of talks, always had both the
companies as equals, and they also retained both the names after the merger. The swap ratio promises
one share of the merged company for every share existing in Idea Cellular Ltd. Analysts suggested
Vodafone India’s business could be valued at ₹828 billion and Idea Cellular business could be valued at
₹722 billion. Book Value approach has been used for approaching the valuation details of both Idea and
Vodafone. Book value is the company’s common stock equity as it appears in the balance sheet, which
is equal to total assets minus liabilities and preferred stock.
Though Vodafone could be worth more than Idea Cellular, the cut-throat competition, in the second
largest telecom subscriber base country, has indeed forced organizations into mergers and other forms of
consolidation.
Vodafone, as evident from the scheme of amalgamation, is a dominant partner in the merged entity
with a stake of 45.1 per cent and will transfer stake of 4.9 per cent to Aditya Birla Group for ₹38,740
million in cash to complete the merger deal. Aditya Birla Group owns 26 per cent stake in the merged
entity, and the rest will be held by Idea’s existing shareholders before the merger (Hindustan Times, 2017).

Market Reaction to Merger

The merger of Vodafone and Idea (two debt-ridden firms) was expected to give them relief from hyper-
competition in the telecom industry and some breathing space. They have projected US$1.3 billion
operational savings, and their annualized profit for June Quarter 2018 stood at ₹72,700 million, as per the
reports of JM financial analysts, and in the same period, Vodafone Idea net debt was 15 times its profit, the
earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio roughly being 4.4 times.
Figure 1 of JM Financial Mint Research clearly shows the fall of EBITDA margins of the combined
firm and also weakening of leverage ratios as both the firms were debt ridden at the time of merger.
Idea share price plunged from ₹120 to an average of ₹72.50 when the speculation about a possible
merger began in the markets. In a knee-jerk reaction to the formal announcement of the deal by Idea
Cellular and Vodafone, Idea shares fell by 14 per cent. Analysts speculated the reason to be speculation
over new management and operational issues, which could be the reason for the dipping of prices of Idea
Cellular shares.

Table 1. Scheme of Amalgamation

VIL 45.10%
Aditya Birla Group 26.00%
Idea’s Shareholders 28.90%
100.00%
Source: Equity Master (2018).
Raju and Madhuri 5

Figure 1. Diminishing Returns of Vodafone Idea Post-merger Announcement

Source: Pal (2018).

On 20 March 2017, the announcement made by Idea Cellular to the bourses about amalgamation of
the company with VIL (Table 1), Vodafone Mobile Services Limited (VMSL) with the company, Idea
Cellular share trading on BSE at ₹100.70 per share at 10.45 h fell as low as ₹92 per share, down by over
14 per cent compared to the previous closing price. On the NSE, the stock was trading at ₹101.35 at
10.45 h, reaching as low as ₹92.35.
After the completion of merger to the present, the share prices of Vodafone Idea have been tumbling
down. Figure 2 provides the chart of stock price behaviour of Vodafone Idea for the last year (Pal, 2018).

Figure 2. Vodafone Idea Share Price

Source: Equity Master (2018).
6 Global Business Review

Table 2. Current Valuations

Details Units
Current price 16.45
P/E 11.39
P/BV 0.53
52 Week H/L-BSE 39.68/14.95
52 Week H/L-NSE 39.77/14.90
EPS 1.44
Market cap (₹ million) 143,697.10
Source: Equity Master (2018).

Figure 2 clearly shows the falling of share price from Jun 2018 to April 2019. Though there was some
recovery and support during July 2018 to August 2018, the recovery was for a very short period, and the
stock kept plunging downwards later. The current valuations in the month of May 2019 are presented in
Table 2.
Vodafone Idea earnings per share stands at 1.44, a considerable improvement over the last year
recorded EPS value (−1.1). The price to earnings (P/E) ratio, at current price of ₹16.49 (6 May 2019),
stands at 11.39. The price to book value at the current price level stands at 0.53 times. The key ratios of
Vodafone India of the FY 2018–2019 relative to FY 2017–2018 are presented in Table 3.
The current ratio that measures the company’s ability to pay its short-term obligations has improved
from 0.4 last year to 0.9 in the FY 2018–2019. This indicates a positive working capital position relatively.
Though the less than one ratio indicates not a very prominent working capital management, the current
assets of VIL are unable to pay away short-term obligations.
The interest coverage ratio measures the ease with which the company can bear its interest expense
on outstanding debt. Higher ratio is recommended by analysts. This ratio has reduced from 0.7 in the last
year to −0.4 in the FY2018–2019. The reduced values indicate the reduced abilities of cash flows to pay
off the debts existing in the capital structure. It shows a precarious position of profitability of VIL.
Return on assets (ROA) is a profitability measure and measures how efficiently the assets are put to
use to generate earnings. This ratio has also reduced from 3.7 to 0.7 in the FY 2018–2019. The return on
assets indicate a negative effect on the profitability of VIL.

Table 3. Key Ratio Analysis—Vodafone India Limited

Ratios March 2017 March 2018

Current ratio (times) 0.4 0.9
Debtors days (days) 13 11
Interest coverage (times) 0.7 −0.4
Debt to equity ratio (times) 2.1 2.1
Return on assets (%) 3.7 0.7
Return on equity (%) −1.6 −15.3

Return on capital employed (%) 4.1 −2

Source: Created by the case authors using Exhibit 3.

Raju and Madhuri 7

Return on equity (ROE) is the profitability measure of ability of firm to generate profits on the
shareholders’ capital. This ratio also has reduced from −1.6 per cent to −15.38 per cent in the FY 2018–
2019. The earnings of the equity shareholders have been affected severely, and their value of investment
has been eroded/the negative ROE of the merging company will have a negative effect of the new
merged entity.
Return on capital employed (ROCE) is the measure of profitability of the company to generate
profits from the capital employed that includes equity and debt capital. This ratio has declined from 4.1
per cent in FY 2017–2018 to −2 per cent in FY 2018–2019. The low interest coverage ratio, low current
ratio and the declining ROCE indicate a very weak profitable position of VIL. The declining ROE and
the impact of leverage have reduced the ROCE of VIL.
VIL completed the process of merger in August 2018 . The Quarter results after the merger, in the
September and December Quarter, show that the expenses were up by 47.6 per cent and the operating
income appreciated by 53.5 per cent (Exhibit 4).
The growth of profit margins in the quarter ending December 2018 as compared to Quarter ending
September 2018: operating profit margin has witnessed a growth of 122.6 per cent as against 1.4 per
cent in 2 QFY 2018. Net profit margin has a shown a substantial change of 200.6 per cent QoQ,
changing from −63.7 per cent in the second Quarter to 42.1 per cent in the third Quarter (Equity
Master, 2018).

Potential Synergy of Merger

The numerous mergers and acquisitions in the telecom sector in India in the past few years clearly
indicate consolidation in the telecom sector. It is projected that by 2020, the industry will have very few
major players that will dominate the Indian telecom sector. Idea and Vodafone too felt the need for
restructuring and identified their compatible partner so that they would maximize their value creation
through synergies. The following synergies are expected to arrive form this merger:
Operational synergies: This merger will make Vodafone Idea a low-cost operator in the Indian telecom
sector. They would operate at low cost and supply to high-value Indian telecom markets. This would
increase Idea Vodafone profitability manifold.
Manpower synergies: This merger opens up access to technically sound professionals from both
renowned organizations of Idea and Vodafone. This will enable leveraging of technical skills, knowledge,
work culture exchange, know-how and management expertise between both the companies.
Marketplace synergies: Idea and Vodafone are well placed in the Indian telecom sector with an
extensive customer base. This merger will boost their customer base and increase their revenue and
leverage the combined skills for maximizing market share (Sarkar, 2018).

Struggle Continues
A report submitted by Moneycontrol speaks about how Vodafone Idea is losing their market share to
Bharati and Jio. It reports that they have lost 29 million subscribers, and market share has shrunk by 656
bps over the last 8 months. In December 2018, they have lost 2.3 million subscribers (Exhibit 5).
With all the information available with her, Ms Priya Vaidehi was mulling over the decision, if she
should really invest in the shares of Vodafone Idea, which is still struggling to reach its summit.
8 Global Business Review

Exhibit 1. India: Wireless and Internet Subscriptions

Source: Indian Brand Equity Foundation (2018).

Exhibit 2: Telecom Sector Market Share

Source: Equity Master (2018).

Exhibit 3. Consolidated Balance Sheet as on 31 MARCH 2018 (in ₹ million)

As at 31
Particulars Notes March 2018 As at 31 March 2017
Assets
Non-current assets
Property, plant and equipment 7 244,549.33 228,442.96
Capital work-in-progress 6,512.98 13,302.99
Goodwill on consolidation 61.20 61.20
Other Intangible assets 8 552,308.61 539,128.25
Intangible assets under development 8 29,339.89 62,048.00
(Exhibit 3 Continued)
Raju and Madhuri 9

(Exhibit 3 Continued)
As at 31
Particulars Notes March 2018 As at 31 March 2017
Financial assets
Investments accounted for using the equity method 9 16,601.12 14,784.75
Long-term loans to employees 24.00 25.93
Other non-current financial assets 10 4,180.01 4,864.75
Deferred tax assets(net) (refer note 56) 12,051.57 368.97
Other non-current assets 11 17,797.36 27,693.89
Total non-current assets (A) 883,426.07 890,721.69
Current assets
Inventories 12 366.65 587.97
Financial assets
Current investments 13 56,304.30 48,997.52
Trade receivables 14 8,873.86 13,139.21
Cash and cash equivalents 15 193.15 782.46
Bank balance other than cash and cash equivalents 16 98.19 44.97
Current portion of loans to employees 20.16 20.75
Other current financial assets 17 313.74 399.09
Current tax assets (Net) 7,751.69 25.10
Other current assets 18 17,914.97 12,312.07
Total current assets (B) 91,836.71 76,309.14
Assets classified as held for sale (AHFS) (refer note 19 10,508.87 16.11
40(i)) (C)
Total Assets (A+B+C) 985,771.65 967,046.94
EQUITY AND LIABILITIES
Equity
Equity share capital 20 43,593.21 36,053.28
Other equity 21 229,031.39 211,269.16
Total equity (A) 272,624.60 247,322.44
Liabilities
Non-current liabilities
Financial liabilities
Long-term borrowings 22 569,408.00 516,378.28
Other non-current financial liabilities 23 26,061.68 10,381.81
Long-term provisions 24 3,107.49 3,842.29
Deferred tax liabilities (net) (refer note 56) 659.35 13,587.10
Other non-current liabilities 25 5,601.19 4,920.46
(Exhibit 3 Continued)
10 Global Business Review

(Exhibit 3 Continued)
As at 31
Particulars Notes March 2018 As at 31 March 2017
Total non-current liabilities (B) 604,837.71 549,109.94
Current liabilities
Financial liabilities
Short-term borrowings 26 216.94 347.09
Trade payables (refer note 58) 35,479.09 40,776.67
Other current financial liabilities 27 43,820.06 102,560.08
Other current liabilities 28 26,597.11 26,732.08
Short-term provisions 29 223.69 198.64
Total current liabilities (C) 106,336.89 170,614.56
Liabilities classified as held for sale (refer note 40(i)) (D) 1,972.45 -
Total Equity and Liabilities (A+B+C+D) 985,771.65 967,046.94
The accompanying notes are an integral part of the Financial
Statements
Source: Vodafone Idea Ltd. (2018).

Exhibit 4. Vodafone Idea Quarterly Financials

Details (₹ million) September 2018 December 2018 QoQ Change

Net sales 76,635 117,648 53.50%
Other income 2,151 2,180 1.30%
Turnover 78,786 119,828 52.10%
Expenses 72,021 106,279 47.60%
Gross profit −1,044 144,243
Depreciation 30,059 47,734 58.80%
Interest 21,662 28,248 30.40%
Profit before tax −50,614 70,441
Tax −453 19,997
Profit after tax −50,161 50,444
Gross profit margin (%) −1.4 122.6
Effective tax rate(%) 0.9 28.4
Net profit margin(%) −63.7 42.1
Source: Moneycontrol.com (2019).
Raju and Madhuri 11

Exhibit 5. Active Subscriber

Source: Moneycontrol.com (2019).

Synopsis
In the month of May 2019, Ms Priya Vaidehi who works as a chartered accountant in a small firm in the
city of Pune was pondering about her personal investment. While surfing on social media on the sunny hot
afternoon of 2 May 2019, she came across the news of the biggest merger deal in the Indian telecom
sector. The news was about how Britain’s Vodafone Group merged its Indian subsidiary with Idea Cellular,
to create the country’s largest telecom firm. They mentioned how the combined entity will accelerate the
pan-India expansion of wireless broadband services and also expand financial inclusion through mobile
money services. Since the merger, the network has an outreach of 92 per cent of the Indian population.
Ms Vaidehi, planning for her future investments, narrowed down her investment search to do a deeper
analysis of the merger of two telecom giants Vodafone and Idea. The Indian telecommunication market
has a subscriber base of 1.20 billion and is rapidly growing. The country’s wireless subscriptions have
witnessed CAGR of 19.62 per cent to reach 1,183.41 million in the year 2018. Over the past few years,
from the announcement of the merger to the declaration of completion of merger, she has noticed that
there has been volatility in the share price of Idea Cellular. Though the subscriber base of Vodafone Idea
is around 400 million and sales had gone up by 53.5 per cent in the third quarter of FY 2018–2019, the
share price had been plunging to an average fall of 14 per cent. She was in deep thought whether she
should invest in buying the shares of Vodafone Idea? Will her instinct help her or the knowledge of
financial markets aid in taking the right decision?
12 Global Business Review

Learning Objectives
●● to evaluate the strengths, weakness, opportunities and threats of the Vodafone Idea merger;
●● to analyse the financial performance (financial statements and ratio analysis ) of the investment
target;
●● to evaluate the Vodafone and Idea merger and its impact on the share price; and
●● to understand the impact of merger and acquisition on operating efficiencies of the organizations
involved.

Position in Course
MBA-, MBA executive and BBA-level programmes. The case can be used in a finance course on
valuation in an undergraduate or MBA programme.

Acknowledgement
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

ORCID iD
Roshan Raju https://orcid.org/0000-0002-2636-6196

Assignment Questions
1. What kind of integration is it—horizontal or vertical? What is the rationale of merging of Vodafone India
and Idea cellular from Idea cellular’s perspective?
2. Analyse financial performance of Vodafone Idea merged entity.
3. As Ms. Priya Vaidehi, what will be your assessment of investing in Vodafone Idea merged entity?
4. What will be the impact of amalgamation on the operational efficiencies of the merged entity?

Teaching Plan
This teaching note accompanies the case study titled Vodafone and Idea merger: A shareholder’s dilemma.
Teaching this case begins by asking students/participants to individually read and think about the case prior to
class. A 10-min introduction to the case by the instructor may be useful before beginning the discussion.
Then the instructor can involve the class and work on the assignment questions mentioned earlier. The class can
be broken down into few groups consisting of 3–6 students in each group. The number of groups will depend upon
the students/participants in the classroom. The groups should discuss and summarize their answers to each of the
assignment questions presented in the case study and choose one representative student to present a summary of the
group’s answers to the class. This will provide an encouragement to each student to be a part of the case study
discussion.
Raju and Madhuri 13

Discussion Point Time (min)

Introduction: A brief about the telecom sector in India and the growth 10
opportunities.
Discuss the emergence of Vodafone and Idea Ltd. as individual entities.
Assignment Question 1: What kind of integration is it—horizontal or vertical? 20
What is the rationale of merging of Vodafone India and Idea cellular from Idea
cellular’s perspective?
Merger and acquisition theory to be introduced. Vodafone Idea merger to be
discussed in detail.
Students should be encouraged to do a SWOT analysis of the merged entity.
Assignment Question 2: Analyse financial performance of Vodafone Idea merged 20
entity.
Discuss ratio analysis theory and identify various types of ratios that can be
calculated to understand the financial performance of Vodafone Idea.
Assignment Question 3: As Ms Priya Vaidehi, what will be your assessment of 15
investing in Vodafone Idea merged entity?
Discuss about Vodafone idea annual report, share price along with the market
reaction to the merger.
Assignment Question 4: What will be the impact of amalgamation on the 15
operational efficiencies of the merged entity?
Understand about the dynamics of the merged entity and discuss in detail the
operational efficiencies taking into consideration Vodafone Idea quarterly financials.
Conclusion: The protagonist evaluates the decision to invest or not invest in the 10
share, considering the competition Vodafone Idea faces in the coming future.

Analysis

Assignment Question 1
What kind of integration is it—horizontal or vertical? What is the rationale of merging of Vodafone India
and Idea cellular from Idea Cellular’s perspective?
Analysis: The merger between Vodafone India an Idea Cellular is a horizontal integration, as both the companies
are telecom service providers.
The Indian telecom Industry after entry of Reliance Jio has become very competitive, with the new entrant
Reliance Jio initiating reduced tariffs, cheap data plans and free voice calls. This price war has made the existing
players defend themselves by either consolidation or leaving the industry. In this scenario, Idea Cellular and
Vodafone had to come together to beat the cheap data plans and free voice calls.
The merger will bring about economies of sales, service channels, operational efficiencies, reduce costs and
streamline regional and nationwide information technology systems.
It will definitely expand business for both the merged companies and benefit from the synergies of operational
excellence, human resources and logistics alignment and earn more profits.
The rationale and the need for merger can better be understood by analysing the Michael Porter’s Five forces, that is,
competition in the telecom sector, barriers to entry, bargaining power of suppliers and customers, and demand and supply.
High intense competition has resulted in prompt service and supply to the subscribers and the huge population of
India, and the demand for digitalization has, indeed, increased the demand for telecommunication services. Improved
competitive scenario has certainly reduced the bargaining power of the service providers/suppliers and with the
variety of services available, such as the 2G, 3G and 4G, the bargaining power of buyers has increased considerably.
The low tariffs, free voice calls and cheap data plans have made the barriers of entry into the sector for any newcomer
14 Global Business Review

highly difficult. Less in number but large-sized established players have made the entry barriers very high. The
switching of services and low tariffs have certainly intensified the competition in the Indian telecom sector, and in
defence, all the players are looking forward for consolidation to avoid future losses (Exhibit 6)

Assignment Question 2:
Analyse financial performance of Vodafone Idea merged entity.
Analysis: Vodafone Idea financial ratios are not very healthy, owing to the recent completion of their merger and
cut-throat competition in the telecom sector led by Reliance Jio. Vodafone and Idea have been debt-ridden companies
for quite some time. Synergies of the operational efficiencies is yet to materialize. The current ratio reflects good
management of the short-term obligations, compared to the previous year. The profitability ratios are not encouraging.
Return on equity has moved towards the negative side after declaration of merger from −1.6 per cent to −15.3 per
cent. Return on capital employed is showing a negative value, reflecting the inefficiency of the debt and equity
capital employed. But, contrary to the ratios, the Quarter-on-Quarter results (QoQ) have shown positive growth in
the second quarter of Financial Year ending September 2018 and third Quarter ending December 2018. The gross
profit margin is up by 122 per cent, and net sales are also up by 53.5 per cent. The current valuations as on 6 May
2019 show a P/E value at 11.39 times.
The consolidation between the two service providers shows healthy Quarter-on-Quarter performance on promises
to correct its course and add value to its shareholders in the long run (Equity Master, 2018).

Assignment Question 3
As Ms Priya Vaidehi, what will be your assessment of investing in Vodafone Idea merged entity?
Analysis: The Indian government has planned for developing 100 smart cities and Internet of Things (IoT) plays
the most crucial role in the development process. The increasing usage of smartphones and digitalization promise
almost US$100 billion investments by 2022 in Indian telecommunications sector, according to the national Digital
communications Policy 2018. The CAGR of the telecom sector in India is around 30 per cent. This growth momentum
is likely to accelerate in the coming years, due to the demographic dividend in the country where majority of the
population is below the age group of 35 years and the macro-economic factors along with the development plans of
the government do paint a rosy growth picture of the telecom sector.
With this merger, Vodafone Idea has become the largest telecom operator in India, followed by Airtel and
Reliance Jio. Thus, with the strong subscriber base and the infusion of funds by the government to develop
infrastructure, the growth of this telecom behemoth is very promising, and after few hurdles, it will re-establish its
market potential and would lead to shareholders’ value appreciation in the portfolio (Exhibit 7).

Assignment Question 4
What will be the impact of amalgamation on the operational efficiencies of the merged entity?
Analysis: The operational synergies to Vodafone and Idea will result foremost from the large amount of tower
overlap that will lead to reduced operational expenditure, quicker rollout of coverage potential and, therefore,
improved margins.
The merged company is likely to achieve operational synergies of US$600 million by March 2019, an estimated
amount of US$1.3 billion savings on operational expense and an additional saving of US$300 million is expected
by year ending March 2020. The merged service is estimated to have subscriber base of 92 per cent of the Indian
population, with their varied services in 2G, 3G and 4G. Idea will infuse funds into the merged company of around
₹67.5 billion, ₹86 billion investment from Vodafone and monetization from stand-alone towers of both organizations
will be ₹78.5 billion.

What Happened
The new entrant into the Indian telecom sector, namely Reliance Jio, with its cheap data plans and free voice calls
has intensified the competition in the Indian subcontinent, which has growing consumer population. As a result of
this competition, the existing players had to leave the industry, viz. Videocon, or consolidate their efficiencies to
sustain and be profitable in the telecom sector. In this process, Vodafone and Idea merger is the biggest merger in the
Raju and Madhuri 15

Indian telecom industry, which has a big impact on the other telecom companies, and it is also the biggest telecom
player today, yet its share price after the completion of merger has been plunging down. But analysts say that the
CAGR of the telecom sector will be 30 per cent by 2021.
Exhibit 6. Company Profile
Company: Vodafone Idea Limited is an Aditya Birla Group and Vodafone Group partnership. It is India’s
leading telecom service provider. The company provides pan-India Voice and Data services across 2G, 3G and
4G platforms.
Headquarters: Suman Tower, Plot no. 18, Sector 11,
Gandhinagar, Gujarat -382011.
Website: https://www.vodafoneidea.com/
Industry: Telecom
Type: Privately held
Source: Created by the case authors using company information.

Exhibit 7. Revenue Market Share (%) for Vodafone Idea, Bharati Airtel and Reliance Jio
Source: Bloomberg quint.

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