Vodafone in merger talks with Idea; three hurdles deal may face

Malini BhuptaMoneycontrolIt is finally official. Vodafone Plc on Monday confirmed that it was in talks with Idea Cellular, an Aditya Birla Group company, for a possible merger. Vodafone Plc said that any merger would be effected through issue of new shares in Idea to Vodafone.“Vodafone confirms that it is in discussions with Aditya Birla Group about an all-share merger of Vodafone India (excluding Vodafone’s 42% stake in Indus Towers) and Idea,” the British company said in a statement, adding that its Indian operations would be deconsolidated as a result if the merger went through. Indus Towers is the largest telecom tower company in India and is jointly owned by industry majors Bharti, Vodafone and Idea.The noise around the merger got accelerated last Friday as Idea decided to delay its quarterly results without any explanation. The Street typically views this as a sign before a possible corporate action being announced. Moneycontrol’s sister entity CNBC TV 18 broke news of the merger last August.Sources close to the two sides told Moneycontrol that the talks began at the top level that month, when Vodafone Plc’s representatives are understood to have met group chairman Kumar Mangalam Birla in Mumbai. The British telecom major was keen on a possible merger back then so that it could bid for spectrum in the October auction, keeping in mind the synergies, the sources said. They added that Kumar Birla did not want to cede operational control in the new company. Even after Monday’s announcement, it was not immediately clear who would call the shots in the merged entity. In case Vodafone does decide to cede management control, Birla may have to pay a premium to the British telecom major for giving up management control. It’s understood that Vodafone, which faces stiff competition from the recently launched Reliance Jio, has long been unhappy with operating conditions in India and has been unable to grow market share in the past year. Without a merger happening, Vodafone and Idea would each have to cough up Rs 20,000 crore for the roll-out of data services.According to Bank of America Merrill Lynch, “The management teams’ strategies, ownership and control would need to be decided. Any potential integration issues are not ruled out given the scale benefits. For instance, the vendors would likely need to be realigned, where some network disruption risks remain.”Had the merger been decided upon before the spectrum auction, both Idea and Vodafone would not have had to cough up the amounts they did in October. The sources said that Vodafone on its part had been keen on the merger back then and continues to be so even now, as a merger will not only create the country’s largest telecom company with a market share of 43 percent but will also lead to operational efficiencies. Idea has a revenue marketshare of 20 percent while Vodafone has a revenue marketshare of 23 percent. Bharti Airtel on the other hand has as revenue marketshare of 33 percent. Potential problems the merger may face1. The merger would need the blessings of the Competition Commission of India (CCI). For getting such approval, the merged entity would likely have to relinquish spectrum in a few circles like Gujarat, Maharashtra, Haryana, Kerala and UP West. Additionally, it would have to liberalise its historical spectrum amounting to Rs 2,000-3,000 crore.2. Tower company Indus’s shareholding pattern would need to be realigned. Currently Bharti and Vodafone have equal ownership at 42% each with Idea/Providence owning the remaining 16%. Any Vodafone-Idea merger would need to see tower ownership realigned, says Bank of America Merrill Lynch. The tower company’s value may be impacted as rentals may decline post merger. 3. Integration risks can take attention of management from the market. Experts expect the completion of the merger by December this year.