Podcast | Digging Deeper - A closer look at the Vodafone-Idea merger

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26 Aug, 2025 12:21

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Two of India’s mobile operators, Vodafone and Idea Cellular, have merged to form India’s largest telecom service provider - a company with over 400 million subscribers.

This merger was in the making for a long time now. It had run into hurdles with the National Company Law Tribunal (NCLT) but received a clearance from the tribunal at the end of August. On Digging Deeper, we discuss the merger of Vodafone India and Idea Cellular.

The new entity is named Vodafone Idea Ltd. It has a board of 12 directors and includes Kumar Mangalam Birla as its Chairman. The board appointed Balesh Sharma as the CEO. The combination has an all India revenue market share of 32.2 percent and is the top dog in nine telecom circles.

Vodafone Idea Ltd takes over from Bharti Airtel as India’s largest telecom operator, with a broadband network of 3.4 lakh sites and distribution network with 17 lakh retail outlets.

A joint statement from Vodafone and Idea said, “The merger is expected to generate Rs 14,000 crore annual synergy, including opex synergies of Rs 8,400 crore, equivalent to a net present value of approximately Rs 70,000 crore.” Net debt stood at Rs 1,09,200 crore as of June 30, 2018.

Kumar Mangalam Birla, Chairman of the Aditya Birla Group, and now Vodafone Idea Limited, said, "...It is truly a historic moment...we are partnering in this initiative by building a formidable company of international repute, scale and standards".

The new entity claims it is starting on a fairly firm footing. Its statement said, “The equity infusion of Rs 6,750 crore at Idea and Rs 8,600 crore at Vodafone, coupled with monetization of standalone towers of both companies for an enterprise value of Rs 7,850 crore, provides the company a strong cash balance of over Rs 19,300 crore post payout of Rs 3,900 crore to the Department of Telecom (DoT).”

The monetization reference there is to the option that Vodafone-Idea has to monetize an over 11 percent stake in Indus, a mobile tower company, amounting to a cash consideration of Rs 5,100 crore.

Vodafone-Idea Ltd will have a wide spectrum portfolio of about 1,850 MHz, over 2 lakh mobile sites and about 2.35 lakh km of fibre. They claims this allows them to offer "superior voice and broadband connectivity across the country, covering 92 percent of the population and reaching nearly 5,00,000 towns and villages.”

Jio vs the rest

How the telecommunication market plays out is anybody’s guess, thanks to one game changer - Reliance Jio, the company which can be said to have precipitated this merger.

In fact, Reliance, in the form of a welcome, threw some snark their way on the day the merger was announced. The company tweeted at Vodafone’s and Idea’s twitter handles:

Bringing people together since 2016. ❤️@VodafoneIN @Idea #WithLoveFromJio https://t.co/A7iDw6awvK

— Reliance Jio (@reliancejio) August 31, 2018

Vodafone responded with it’s own tweet:

Thanks for the love, everyone. We gracefully accept all your wishes. Latecomers and gatecrashers included.❤️

— Vodafone (@VodafoneIN) September 1, 2018

Alright, admittedly, that was middle-school level banter between the social media teams of the mobile operators. But the reality is, Reliance Jio maketh the market nervous.

 Mint reported around the time of the merger that since Reliance Jio Infocomm Ltd launched services in 2016, revenues of India’s wireless industry have witnessed a steady decline. The only exception was the June-September quarter of 2017, when Jio started reporting revenues, and made up for the drop in revenues of other telecom firms. That was the case again in the April-June quarter this year - Jio’s incremental revenues made up for the drop in others’ revenues.

Media reports indicated that Reliance Jio is way ahead of other players in terms of revenue growth— Q1 revenues grew 14 percent. Meanwhile, Bharti Airtel was relatively better off with revenues growing by about 1percent last quarter. Idea Cellular and Vodafone India reported a 4 percent and 2 percent drop in revenues, respectively.

According to analyses by JM Financial Institutional Securities Ltd, the Vodafone and Idea combined entity’s revenue market share dropped from 42.4 percent a year ago to 34.1 percent by August 2018. That’s a substantial hit. On the other hand, Reliance Jio - the gatecrasher, as Vodafone snarkily pointed out - raced from zero to a 22 percent share in the same period. And that’s not all. Analysts say that if revenues related to non-mobile businesses, such as fixed line, are left out using rough estimates, Reliance Jio’s share rises to 23.5 percent.

Golden handshakes

Before the merger, the Economic Times reported that Vodafone was offering golden handshakes to strong performers who could be accommodated after Vodafone’s merger with Idea Cellular. By golden handshakes, we mean, of course, generous severance packages. ET claimed that sources said Vodafone was offering the retrenched executives their monthly salary multiplied by the number of years they worked with the group. How generous?

The golden handshakes have been given from Level 1 to Level 4. One source reportedly told ET that they were very generous offers in line with the way the group manages its separation policy. The ET report also said that the top-rung of the workplace hierarchy was classified as Level 1 while Level 4 comprises senior managers.

About 70 executives had received a golden handshake by late August, prior to the all clear from the NCLT. ET then reported a couple of days ago that the new entity is targeting $10 billion synergies from both companies, with a major part being rationalisation of tower tenancies.

But Vodafone-Idea Ltd may have to cap employee headcount around the 15,000 levels. Both companies might be forced to lay off about 2,500 people from their total staff of 17,500-18,000. Many employees could get absorbed in the parent companies (Aditya Birla Group and Vodafone group) while some others will have to look for employment elsewhere.

A Moneycontrol report stated that the new firm claimed it will treat employees from both merging partners equally. It will also reportedly control promotions and incentives while starting out. Salary hikes are likely to be skipped this year since the primary motive is to settle into the market, said the report.

A Bank of America-Merrill Lynch analysis observed that the integration of the two companies will be the most critical for the post-merger entity. “One is a domestic company while the other is an international one. On day 1 of the merger, the 2 tenancies of each of these sites will be accounted as 1 tenancy and 1 loading, which should result in Rs 2,000 crore savings on an annualised basis according to estimates,” said the report.

The investment bank’s report added that Vodafone-Idea Ltd has 73,000 overlapping sites, and the next steps of integration would involve removing the overlapping 3G/4G equipment, which would lead to power savings.

Market reaction

Meanwhile, the markets responded fairly positively to the merger. Shares of Idea Cellular gained more than 6 percent in the morning trade after the merged company received NCLT approval. But research house JPMorgan maintained an underweight call on Idea Cellular with a target of Rs 50 per share.

It believes the post-merger numbers do not look good unless there is an evident revenue recovery. Deutsche Bank maintained a buy on Idea Cellular, while it cut the target price to Rs 100 from Rs 105 with a potential upside of 101 percent. According to Deutsche Bank, the fight is for next billion eyeballs and content is the new battle ground.

Mint observed that while Vodafone Idea is India’s largest telco, it is also its most vulnerable. While Vodafone-Idea leads the industry by a fair margin in revenue and subscribers, it’s a diffrent story in terms of profitability and leverage ratios. For example, it’s trailing 12-month Ebitda was 20% lower than that of Bharti Airtel’s wireless business, even though its revenues were 33% higher.

Analysts at JM Financial estimate that the combined entity’s annualized profit stood at Rs 7,270 crore in the June quarter. The new company’s net debt is around 15 times its profit. Mint reported that JM Financial’s analysts estimate a cash burn of roughly Rs 4,000 crore per quarter for the new entity. Its cash balance should last about five quarters, assuming there is no recovery in tariffs.

Another problem could be that the Vodafone Group seems in no mood to invest heavily in its Indian arm. It is selling a part of its holding to Idea’s promoters and has already de-consolidated the Indian operations from its books of accounts. Little wonder then that analysts and industry observers see the merged company as the most vulnerable telco in the country, despite being the largest.

Adding to their woes, Reliance Jio is not done with aggressive tariffs. While the company has captured a majority share in the smartphone segment, it has only recently entered the postpaid segment. Jio has not yet made any major inroads into the feature-phone segment either. Its current revenue market share of 23 percent is only half of its stated goal. But even if tariffs remain steady, market share gains by Jio can erode profitability for Vodafone Idea.

The merged company needs to raise the tempo in terms of investments and defend market share. Subscriber and revenue data in recent months indicate it has been losing market share, while Airtel has been fairly successful in defending itself. Some analysts even go so far as to say that the company perhaps needs to raise additional equity, given the cash burn, and the need to invest heavily.

That becomes all the more significant given Jio’s efforts at consolidation. Anil Ambani’s Reliance Communications reported in the last week of August that it completed the sale of fibre assets worth Rs 3,000 crore to Mukesh Ambani’s Reliance Jio. After the completion of the fibre monetization transaction, Reliance Jio owns a 1,78,000 kilometres fibre network.

In the face of such moves, Vodafone-Idea is trying to win and keep customers. As per media reports, it more than doubled the incentives given to retailers for adding subscribers. Retailers used to receive Rs 70 to Rs 80 per customer from these companies.

Now, however, according to a Mumbai- based distributor who spoke to the Economic Times, “Vodafone and Idea’s retailers have been told that for every new customer, they will get Rs 180-250, depending on the recharge plan they manage to sell. Higher the recharge amount, more the incentive.”  

Further, Idea and Vodafone have to reduce their subscriber share in six circles to comply with the rule of mergers not being allowed to have more than 50 percent of the total subscribers. The ET report also said that Idea and Vodafone lost some of their distributors who now wish to join other mobile providers. And they have little choice but to raise incentives.

Reports state that Airtel may match the incentives given by Vodafone and Idea in certain areas while retailers of Jio expect a 100 percent rise in their incentives. But incentives alone won’t help them either. Bharat Bhargava, partner, telecom advisory services for EY explains that the companies need to incentivize retailers to not just sell SIM cards but convince customers to turn the Vodafone Idea chip into their primary number.

The road ahead

So what does the future hold for Vodafone-Idea Ltd?

With most other telecom companies having exited the market, analysts expect Reliance Jio’s market share gains to come at the expense of Vodafone Idea. This is simply because the two companies are still far behind Reliance Jio and Airtel in terms of network investments; investments that the Vodafone Group hasn’t been keen on making.

It remains to be seen if the company’s stability in revenues seen in the June quarter continue in the future. It could come apart if Reliance Jio decides to get more aggressive in pricing. A lot depends on Jio’s attempts to make inroads into the post-paid segment and the feature phone segment. If the response to the Jio’s new offers in these segments is lacklustre, the industry may well have to prepare for another round of downtrading.

All things considered, it is not going to be smooth sailing for the biggest telecom company in India. The new entity is expected to be trading jibes with Reliance Jio for a while. Let’s just hope the banter gets better.