Idea, Vodafone businesses on a rapid decline

Vodafone and Idea Cellular seem to be racing against time as they head for a merger that will create the biggest telecom firm in India.

The Street is watching with trepidation the timelines for the merger, which are critical to prevent further erosion in market share and Ebitda of Idea Cellular. The businesses of both Vodafone-Idea has deteriorated since the merger announcement three quarters back. More than 90% of the expected operational expenditure synergies have been lost and combined Ebitda run-rate has fallen 31%, driven by about 12% drop in revenues, according to an analyst report by Credit Suisse dated December 6.

"Timelines on merger approvals are critical to prevent further marketshare/Ebitda erosion for Idea," Credit Suisse said.

Vodafone MD and CEO Sunil Sood had recently said the merger between Vodafone and Idea Cellular is on track and is expected to be completed in 2018.

The recent numbers show that Idea has not been a participant of the massive growth in the Indian mobile data market. Over the last year, there has been a significant fall in data prices and selling price of smartphones and data subscriber base in the industry has doubled.

Though Idea's customers have bought 30 million smartphones over last year at a growth rate of 43% year on year, the company's data subscriber base has actually fallen, the report said. "This loss of market share and the resultant 30% Ebitda decline yoy (of merged company) nearly offsets all the merger synergies that were targeted when the Vodafone-Idea merger was announced."

The merger was struck after a disruption in the telecom industry created by the entry of Mukesh Ambani-run telecom firm Reliance Jio in September last year. The entry of RJio was marked by free voice calls and dirt cheap data tariffs impacting the margins of existing telecom players and subsequently, forcing them to match the pricing offers to retain their subscribers.

At the time of the merger announcement, Vodafone and Idea had guided $10 billion in net present value of merger synergies which included a steady state operational expenditure savings of $1.3 billion from the fourth year of merger. "The merger approvals are still in process, but the business has deteriorated across both firms since the announcement."

Another report by Bank of America-Merill Lynch (BofA-ML) said the management expects all approvals for the merger to come by March/April. But till then, standalone Idea/Vodafone will be vulnerable to market share loss despite active infrastructure sharing because of aggressive competition from Bharti Airtel and Rjio.

It is expected that both Idea/Vodafone will focus on their core circles by making the necessary investments. In circles where Vodafone is strong, Idea users will roam on that network and vice-versa, and only selective investments would be made in capital expenditure to de-bottleneck any congestion related problems, the report said.

The approvals from Competition Commission of India, Securities and Exchange Board of India and shareholders' approval have come for the merger while those from NCLT and Department of Telecommunications are still awaited.

"While the management is guiding for a total savings of $10 billion after integration costs and spectrum liberalisation payments, we estimate total synergy benefits of $7 billion in our merged entity estimates," the report said.

Post the merger, Vodafone-Idea combined entity will be the largest telecom player displacing Bharti Airtel from its dominant position.