The biggest consolidation in India's telecom sector is officially underway with UK's Vodafone Group Plc and the KM Birla-owned Idea Cellular confirming they are in initial talks to merge their businesses in a cashless deal which could create the country's largest mobile phone operator by subscribers and revenue market share.
While the two companies did not give any details, the statements issued by the two parties suggest that Birla wants equal rights and that Vodafone will hold 50% or less in the merged entity . Vodafone will be issued fresh shares of Idea, which will continue to be listed.
If the merger between India's No.2 and No.3 telcos materialises, the combined entity will knock off Bharti Airtel from the top slot for the first time in over 15 years and with its scale, size and synergies, present a strong response to Reliance Jio's formidable challenge. The merger will result in the Indian telecom landscape being dominated by three strong private firms along with the state-owned BSNL. It will possibly begin the process of renewing price discipline in an industry which has been shaken up by Jio's disruptive entry.
Both companies cautioned that talks were at a preliminary stage and there was no guarantee that they would result in a merger.
If the discussions are successful, Vodafone, which has been embroiled in a multi-billion-dollar tax dispute for the past many years, will buy into Idea through a share swap, but will keep its stake at 50% or below in the combined entity. This will result in its Indian business ceasing to be a subsidiary of Vodafone Group Plc which then won't have to consolidate its Indian unit's numbers, including debt and losses, into its own financials.
In terms of subscribers and revenue, Vodafone India is bigger than Idea Cellular and a merger should result in its parent company holding a bigger stake.
If the merger happens, it will create a formidable entity. The combine will have a 43% revenue market share and over 390 million subscribers, in comparison with Bharti Airtel's 33% market share and 266 million subscribers.
Industry executives and experts said a possible stumbling point in the negotiations could be regarding who controls the new entity with both Vodafone, with a larger balance sheet, and Idea, with a more efficient and faster growing operations, staking claim for the same.
The merger move comes at a time of a brutal price war in India's telecom industry triggered by the entry of Jio in early September which has already hit Bharti Airtel's profits and is poised to hit Idea as well.The telco is expected post its first ever net loss in the quarter ended December.
Vodafone India's financial woes have also been exacerbated by the bruising impact of Jio's free voice and data services.