Pressure created by RJio’s launch and the subsequent pricing competition had pushed the Indian telecom industry to consolidation. Vodafone-Idea merger is the latest transaction in this direction. While there are many regulatory hurdles for the merger, it would nevertheless create a strong player in the industry. We do not expect any reduction in the competition in the industry in the medium term as the large telcos would continue to keep the intensity high. However, in the long term this consolidation is expected to be positive for the industry, as it would restore some pricing power and give better bargaining terms with vendors/suppliers. The industry will be left with 5 major players namely – Vodafone-Idea, Bharti Airtel, RJio, RCom-Aircel-Sistema (assuming RCom – Aircel merger goes through), BSNL – MTNL.
Vodafone-Idea would be the India’s largest telecom operator not only in terms of subscriber base, but also in terms of revenues as well as spectrum holding. Vodafone is the market leader in Metro circles (combined), while Idea is a strong player in category B circles, thus the merged telco would have a strong footprint, with market leadership in 12 out of the 22 circles, and 2nd rank in 9 circles. The merged telco should also benefit from operational synergies which will allow it to curtail some expenses such as co-location rentals and energy costs, customer acquisitions and support teams and reduced expense on branding and advertising. This should translate into profitability uplift to the merged entity, although the same will take some time to materialize.
The transaction faces many challenges and would take almost 1 year to conclude. The merged telco would breach the spectrum holding cap in 5 circles in 900 MHz band and in 2 circles in the 2500 MHz band; and likely to breach the revenue market share cap of 50% in 6 circles. These would have to be resolved in a fixed time frame. Further, the debt levels of the merged telco would be high at around Rs. 108,000 crore, which translates into a debt/EBITDA of approximately 4.4x. Both the entities would have to inorganically deleverage to rein in the debt.