Merger cleared: Vodafone, Idea set to be Vodafone Idea

With the National Company Law Tribunal (NCLT) on Thursday giving its approval to the merger of Vodafone and Idea Cellular, the decks have been cleared for the two to now function as a single entity. An announcement of the date from which the new entity by the name of Vodafone Idea Limited will start functioning will be made as early as Friday.

The final seal of approval from the NCLT came after the two cleared their dues with the department of telecommunications (DoT) last month. After the DoT approval the two were required to report to the NCLT that all processes were complete, thus seeking the tribunal’s final nod for the merger.

Though the merged entity would be the country’s largest telecom operator with total revenues of over Rs 80,000 crore, 400 million customers, 35% subscriber market share and 41% revenue market share, the going will not be very smooth as it will be burdened with a combined debt of around Rs 1.07 lakh crore, which according to Bank of America Merrill Lynch would constrain their capex at around Rs 14,000 crore for the next couple of years. In contrast, the annual capex of Bharti Airtel is at around Rs 24,000 crore.

Analysts said that since the merged entity will be constrained in terms of capex infusion due to its high leverage, it may find it difficult to hold on to its high Arpu (average realisation per user) data subscribers because it would not be able to beef up its 4G network in comparison to Bharti Airtel and Reliance Jio.

“The Vodafone-Idea merged entity will find itself constrained to invest in the business on account of high leverage,” brokerage firm Credit Suisse noted in a recent report. It said Idea’s stagnant 3G/4G subscriber base at 1.1 million net increase on-quarter, which is way below a monthly run-rate of 3 million adds for Bharti and 9 million for Jio, is worrisome.

“In spite of sharp cost cuts, we do not see annual merged entity’s Ebitda (earnings before interest, taxes, depreciation and amortisation) crossing Rs 16,000 crore for the next three years. Net debt is high (Rs 93,000 crore) after Indus sale, 8.5x FY19 Ebitda). We believe interest payouts will eat into more than half of Ebitda generated, allowing little room for capex. At a time when peers (with lower revenues) are investing much larger amounts, this could lead to market share loss for the merged company,” Credit Suisse noted.

Similarly, Bank of America Merrill Lynch noted that the merged entity would be vulnerable to market share losses as both Jio and Bharti, which are ahead of Vodafone and Idea in data investment, are likely to poach their customers.

However, there would be some savings as a result of synergies. For instance, the two would remove overlapping sites, which would result in annual savings of around Rs 2,000 crore.

Analysts said that the merged entity’s first priority would be cost savings rather than scaling up investments and that will be a cause of worry in a market in which Bharti Airtel and Jio are scaling up investments.

In March the two companies had already put in place the leadership team that would drive the merged entity. Kumar Mangalam Birla, the chairman of the Aditya Birla Group, will be the non-executive chairman of the merged entity, while Balesh Sharma, the erstwhile chief operating officer of Vodafone India, will be the new CEO who will be responsible for the combined business’ strategy and its execution as well as driving integration.

The current CEO of Vodafone India, Sunil Sood, will join the Vodafone Group AMAP leadership team and also help governance through board memberships. Himanshu Kapania, the current CEO of Idea Cellular, will be nominated as non-executive board member of the merged entity.