Vodafone India and Idea Cellular merger
A clever play leading to a multi-million dollar shakeup of the Indian telecom industry
Rajul Jagarpapudi London 7/12/18
Business and Finance Guild, London School of Economics
In recent times Vodafone’s global empire has experienced some much-needed reshaping in an effort to transform the group from a sprawling collection of networks and minority stakes into an integrated Telecoms company capable of dominating the largest European markets. This objective has been possible through various asset sales and bulking up in key European markets such as Germany and Spain by acquiring cable businesses. But the divestment of Vodafone’s struggling Indian subsidiary for it to merge with Idea Cellular has by far been the most interesting play if we consider the dynamics of this transaction.
The $23bn merger was precipitated by the arrival to the sector of Reliance Jio, a subsidiary of oil refining giant Reliance Industries, which slashed industry earnings and margins as seen in Fig.1 with a disruptive price war on mobile tariffs and extensive capital expenditure into a pan-national 4G data service. Looking at Fig.2 we can see the increased revenues through expanding customer base to c. 400m and market share expansion to 35% makes the combined entity the #1 Telecom operator in India and provides more firepower to participate in the price war. Whilst, the $10bn worth of cost and capex synergies have been vital in supporting margins. This has been a great exit for Vodafone plc which entered the Indian market back in 2007 looking for new growth frontiers, and now benefits from a $8.2bn reduction in net debt hence lowering group net leverage by 0.3x.
This multi-billion dollar shake up of the Indian Telecom sector is likely to push more transactions and consolidation, adding to its recent dynamism. It would be interesting to keep an eye on this market as significant increases in market consolidation could also eliminate price wars and switch to the other side of the spectrum with collusion and a more oligopolistic market structure.
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