Moneycontrol
Mar 20, 2017 02:34 PM IST | Source: CNBC-TV18

Idea-Vodafone merger: Experts worried about shareholder value due to pricing war

Feel that pricing wars may escalate, which usually does not create much shareholder value. They expect further bloodbath as well.

As Idea Cellular formally announced its merger with Vodafone, experts feel that the developments could imply tough times for shareholder value.

Idea Cellular on Monday announced that its board has approved the merger of Vodafone India and its wholly-owned subsidiary Vodafone Mobile Services Limited with itself in the process creating the country's largest telecom entity.

Vodafone will hold 45 percent in the combined entity. Idea promoters will hold a 26 percent in the combined entity. AB Group will have the right to buy 9.5 percent stake in the entity at Rs 130 per share.

Udayan Mukherjee, Consulting Editor, CNBC-TV18 feels that a stability in prices will not return to the sector based on the merger. He cited the issue of larger players in the sector cutting tariffs as the reason for pricing problem.

In fact, he feels that the new entrant, Reliance Jio, could unleash another round of aggressive prices for voice and data in a bid to capture market share.

“The fact that you still have a leader with 42 percent market share will irk Reliance… it will become a slugfest from now on and there will be blood on the floor,” he said. He says that this expectation of more bloodletting between players in the space will not create great shareholder value.

Nilesh Shah, MD of Kotak Mahindra Asset Management Company (AMC) concurs with the view. “This is a fight for supremacy. Three large players will try to create equilibrium with pricing, which, in the near term, may not be appropriate for shareholders,” he told CNBC-TV18. He does not have an exposure to the sector due to the pricing war among firms.

He highlighted that telecom players are more focused on gaining market share than creating value for their shareholders.

The stock has fallen over 13 percent in the past three days, and saw a one-month fall of over 8 percent. At 11:31 hrs, Idea Cellular was quoting at Rs 98.50, down Rs 9.40, or 8.71 percent, on the BSE. It touched an intraday high of Rs 123.75 and an intraday low of Rs 92.

(Disclosure: Reliance Industries, which owns Reliance Jio, also owns Network18 and moneycontrol.com.)

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