What Vodafone-Idea Combine Lost After Reliance Jio’s Onslaught

Bharti Airtel has gained ground and is within striking distance of displacing the combined entity from the #1 spot.

Vodafone will hold 45.1 percent of the merged entity, while Idea will hold 26 percent.

(Photo Courtesy: Vodafone.co.uk/Twitter/@ideacellular/Altered by The Quint)

The proposed Vodafone-Idea merger is touted to create India’s largest telecom company. But less than a year after the deal was announced, the merged entity’s leveraged position stands weakened, putting its chances of becoming the number one player at risk.

In March 2017, Vodafone India and Idea Cellular Ltd. had said their proposed merger will lead to an operational benefit of Rs 8,400 crore from the fourth year of completion of the deal.

Nearly a year later, the deal is yet to be concluded and fierce competition led by Reliance Jio Infocomm Ltd has weakened the financials of the two companies considerably.

Where Do They Stand Now?

The revenue of the combined entity has declined 12 percent, while its earnings before interest, tax and depreciation and amortisation has fallen by 31 percent, in the 12 months ended September 2017.

Revenue and EBITDA could worsen in the coming quarters as the telecom regulator cut interconnect usage charges by more than half to 6 paise per minute from October.

Operationally Viable?

The two companies had estimated an annual saving of Rs 14,000 crore. Of this, 60 percent was expected to come from operational synergies and the remaining from lower capital expenditure. These synergies were expected to kick in the fourth full year after completion of the merger.

While the operational benefits of Rs 8,400 crore could still play out, the net benefit will be lower due to decline in the EBITDA.

At best, the synergies will enable the merged entity to return to the EBITDA run-rate it had at the time of announcement of the deal. Besides, a 31 percent fall in the combined EBITDA has already increased debt to 6.5 times compared to the 4.4 times estimated.

Will They Still Be Number One?

At the beginning of the year, Vodafone and Idea Cellular had a combined revenue market share of 44 percent. Nine months later, that number’s fallen to 37.8 percent, as per data from the telecom regulator.

Bharti Airtel, meanwhile, has gained ground and is within striking distance of displacing the combined entity from the number one spot.

The merged entity’s revenue market share continues to be above the 50 percent regulatory cap in three circles as against six circles in March.

The merger and acquisition guidelines specify that the merged entity will have to bring down its revenue market share below 50 percent in any particular circle within a period of one year of completion of merger.

The regulatory constraints could help Bharti Airtel not only gain market share, but also retain its number one position.

Post the merger announcement, Bharti also acquired Telenor (India) and Tata Teleservices taking its total combined revenue market share to 35.9 percent, thereby reducing the difference to just 190 basis points.

(This story was originally published in BloombergQuint)

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