Proposed merger = Vodafone + Idea

January 30, 2017 brought the big news for the Indian Telecom industry when British Telecom giant Vodafone Plc confirmed a merger between Vodafone  India and Idea Cellular.

This merger between Vodafone and Idea is expected to have a huge impact on the Indian telecom Industry with Vodafone + Idea capturing 43 percent of the market share beating the market leader, Bharti Airtel which currently holds 33% of market share. The upsurge of 29 percent in intra-day trade in the share capital of Idea Cellular is a  fair representation of this  all-stock merger.

I think it is a great development for our economy because it will improve the financial health of the telecom industry and India’s position in the mass-market. This consolidation will be a solution for many persistent problems in the telecommunication sector. Some of the highlights are:

  • Vodafone and Idea together will be able to have the highest spectrum in this industry, enabling the provision of highest 4G spectrum in the 1800MHz band. This will be a great boom for the data market of India.
  • This will also make Vodafone-Idea, Airtel and Reliance Jio the biggest telecom players in the Indian telecom industry with sufficient market share for each of these players, thus promoting significant investments in the sector.
  • With Idea listed on the Indian stock market, this deal would automatically give Vodafone a listing on the Indian stock exchanges.

Therefore, Vodafone and Idea together will be able to offer cheap high-value products. Hence, this merged entity will have the best-in-class coverage and capacity spectrum. The consolidation will leave enough market share for each player to make significant investments in the Indian entity. As mentioned in a report by JM Financial, the success of this deal will create a three player mobile market which may be more sustainable and profitable in the long-term (Chatterjee, 2017).

Indian telecom market is one of the toughest and most competitive markets in the world. Also, with demonetisation and the attempt to make India a digital economy means a lot for the telecom players. The ‘cashless’ economy will promote mobile governance and hence, make way for a digital payments ecosystem. Hence, companies capturing the market at this time will have a distinct competitive edge.

On the contrary, I think the entry of Reliance Jio has caused pressure on the telecom market leaders such as Airtel, Vodafone and Idea. Reliance Jio’s free distribution of SIM cards has actually been a catalyst for this consolidation, giving this deal the required push. With Reliance Jio and its investment of Rs 150,000 crore in wireless services in India, Reliance captured about 19 percent of the market share with 72 million subscribers in the telecom industry. I believe this merger between Vodafone and Idea will add fuel to fire and increase the spectre of price war in the telecom space. Hence, this deal is likely to start a new competition and mark the beginning of a bitter battle amongst the biggest names in the industry (, 2017).

The combination of two significant players wanting to join forces, and yet not having the money to pay for it is seen as an inflection point in the Indian telecom sector which will have a huge impact in this competitive landscape (Firstpost, 2017).

Do you think the Vodafone and Idea merger is a panacea for Indian telecom sector?