Opinion

Mega Indian Telco Merger: Better late than never

Mahesh Singhi Mahesh Singhi - 27th February 2017
The consolidation in Indian telecom industry was need of the hour. In our view, the merger is fallout of past spectrum auctions which have engendered unhealthy competition, rising capital intensity, leveraged balance sheets and fears from intense competition due to Reliance Jio launch.
The combined entity will create India's largest telecom firm with a revenue share of around 40% and a subscriber base of over 380 million. For the industry as a whole, the merger is a credit positive and may help improve the return on capital employed by 3% by FY19. The promoters of both companies will have equal rights in the new entity.
Merger would entail issuance of new shares in Idea to Vodafone with the former looking for equal rights in the combined entity. The merged entity would look for synergies like cost savings on promotional & advertisements spends, network opex and other overheads.
Experts believe that the merger would be long term positive with better pricing power and improved business economics for telecom service providers. Merger would create huge spectrum capacity for the combined entity across the bands.
The deal is expected to be signed in next few weeks. Given that it would be the largest M&A in the industry, the regulatory approvals could take longer time given that there would be complications. Government/regulator would ask the companies to pay one-time excess spectrum charge of Rs50bn (combined); the matter is currently under litigation. The government might also want resolution on Vodafone’s pending tax irregularity case before it would give a go ahead.
With this deal, Indian telco industry will have 2 large players Vodafone-Idea and Bharti Airtel. The newly launched Reliance Jio would want to catch up fast with aggressive pricing and freebies. We believe these three will remain in long term due to balance sheet strength. Other small players like RCOM, Aircel etc will have no option but to merge with any of the Top 3 at reasonable valuations.


Mahesh Singhi
Managing Director - Partner,
Singhi Advisors Pvt. Ltd.


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