It's complicated: Regulatory hurdles that Vodafone-Idea merger could face
Vodafone India and Idea Cellular today announced their long-anticipated merger, nearly a month after acknowledging that talks were on to join hands.
Moneycontrol NewsVodafone India and Idea Cellular today announced their long-anticipated merger. While the merger will create the country’s largest telecom player, the combine could come up against a number of regulatory hurdles.
As per a BSE filing by Idea, Vodafone will own 45.1 percent in the combined entity while the Idea promoters will hold 26 percent in the new company. The rest will be held by public.
Post amalgamation, the entire business of Vodafone India Limited and and its own wholly owned subsidiary Vodafone Mobile Services Limited (excluding investment in Indus Towers Limited, its international network assets and information technology platforms) will combine with the Aditya Birla owned Idea Cellular.
Here are the main issues that the companies will need to look at:
According to an earlier report by brokerage firm CLSA, the combined entity would hit revenue market share, subscriber market share and spectrum caps in at least five of the total 22 circles. The combined entity will get a year to align with revenue and subscriber market share caps, but it would have to part sell or surrender spectrum to stay below the cap, it said.
With 43 percent revenue market share and 40 percent share of the active subscriber base the combined entity will account for more than 25 percent of allocated spectrum across all bands and may have to sell at least 1 percent to comply to meet spectrum cap regulations.
As per Rajan Mathews, Director General of Cellular Operations Association of India said the main issue will revolve around spectrum holding.
The rules state that spectrum holding should not be higher than 50 percent in each band individually. According to experts, the combine will breach the spectrum cap in at least five circles in the 900 MHz band.
As per government guidelines, there will be no refund of money for excess spectrum. This means that the merged entity would have sell the excess spectrum to competitors such as Airtel. To make matters worse, it cannot command spectrum sale prices.
In a note issued on January 30, Credit Suisse pegged the revenue loss owing to these guidelines at Rs 6,000 crore or more in the 900 Mhz band alone.
Revenue market share
There also obstacles that await on the mergers and acquisitions front, as norms require that revenue market share of the combine should not be higher than 50 percent in any circle.
Together, they will lead in 12 of the 22 circles across India. Experts see the combine crossing the 50 percent revenue share limit in six circles and it will have to address this imbalance within a year in keeping with the regulations.
According to Edelweiss Securities, the reduced share will bring it down to 39.6 percent.
According to a note by JP Morgan Asia Pacific issued on February 15, these six circles together constitute 41 percent of the combined revenues. To meet the norms, the combined entity will have to cede quarterly revenues of Rs180 crore or 8 percent of overall revenue.
Vodafone India has 205 million users and 23 percent market share, while Idea Cellular has 190 million users with 19 percent revenue market share. At 43 percent, the combine will have a 10 percent higher market share than nearest competitor Bharti Airtel. In addition, their base share will exceed the limit of 50 percent in at least nine circles.
And, then there is the matter of Vodafone’s unresolved taxation issues with the government. The merged entity will likely inherit this contingent liability. The dispute amounts to USD 2.5 billion and has been in arbitration since 2012 when the Indian government amended tax laws retrospectively.
There is also the possibility that Idea-Vodafone combined may be asked to pay the one-time fee for spectrum liberalisation. This fee, amounting to about Rs 5,000 crore, is currently under litigation. The Department of Telecom could insist on recovering this money before it allows the merger to proceed.(Disclosure: RIL, which owns Reliance Jio, also owns Network18 and moneycontrol.com)