Vodafone in $23bn merger deal to create India’s largest MNO

As expected, Vodafone is to merge its Indian operations with Idea Cellular in a $23bn deal which will create the country’s largest mobile operator. This will give Vodafone the scale to compete more effectively with established rivals like previous leader Bharti Airtel in the low margin market, and to fend off new challenger Reliance Jio.

The combination of India’s second and third MNOs will create an entity with 42% of the market by subscribers (387m mobile users as of the end of 2016), dwarfing Airtel’s 33% (262m). The two companies are complementary too – Vodafone is strong in the enterprise and higher value subscribers while Idea is a leader among rural markets, which have strong growth potential.

Vodafone Group CEO Vittorio Colao said in a statement: “The combined company will have the scale required to ensure sustainable consumer choice in a competitive market and to expand new technologies – such as mobile money services – that have the potential to transform daily life for every Indian.”

The boards of Vodafone India and Idea Cellular have approved the merger, which brings together companies with total revenue of INR800bn ($12.24bn). The terms will give Vodafone 45.1% of the combined entity after it sells a 4.9% stake to Idea’s controlling shareholder, Aditya Birla Group. Birla will then have a 26% stake, while Idea’s other shareholders will own 28.9%. Birla will have the option in future of acquiring an additional stake of up to 9% from Vodafone so the two companies have equal shares.

Vodafone expects to achieve cost and capex synergies with a value of about INR670bn ($10bn) and says the deal should be “accretive” to its cashflow from the first full year after completion. That could be some while coming, however, depending on the attitude of the telecoms and competition regulators.

The new entity will almost certainly have to divest assets, including spectrum. Indian competition rules say that no telco can have more than a 50% share of subscribers and revenue in any one operating circle. They are also limited to 25% of available spectrum nationwide, and 50% in any one circle.

The deal does not include Indus Towers, but both Vodafone and Idea will sell their stakes in that infrastructure venture (42% in Vodafone’s case, 11.5% in Idea’s).

Meanwhile, the impending merger may affect the rules which are applied to the next spectrum auctions – especially in the case of any caps – and may also influence the bidding. While Vodafone and Idea may hesitate to invest heavily until they are clear on the regulatory conditions of their marriage, others may seek to acquire significant new holdings to try to gain ground on the new leader.

According to media reports, the government plans to sell spectrum in the 3 GHz band this year, along with 700 MHz airwaves that remained on the table after the last auction, and remaining licences in the 800 MHz, 900 MHz, 1.8 GHz, 2.1 GHz, 2.3 GHz and 2.5 GHz bands.

Since most operators now have sufficient spectrum for their short term needs, they may also decide to hold back from more expensive investments in airwaves, and concentrate instead on other ways to outwit Reliance Jio. That company will soon end its free data offerings, which have resulted in over 100m sign-ups for its 4G-only network, but it continues to innovate in pricing and services.

Its latest move is to work with Google on a customized smartphone, according to reports in Hindu Business Line. This will be an affordable 4G device featuring tight integration of RJio’s own applications.

Jio has worked hard to launch a wide range of apps and content, from messaging to music and video to cloud storage and security. By integrating these tightly with Android thanks to the Google cooperation, it will “increase data adoption – helping it render movies and music better over its network. It will also improve the overall quality of service delivered on the Jio network,” according to one of the report sources.