Moneycontrol Bureau

In what will create India's largest telecom company with revenues of over Rs 80,000 crore, Vodafone Plc on Monday said that it is in exploratory discussions with the Aditya Birla Group's telecom arm Idea Cellular for a merger.



"Vodafone confirms that it is in discussions with the Aditya Birla Group about an all share merger of Vodafone India (excluding Vodafone's 42% stake in Indus Towers) and Idea. Any merger would be effected through the issue of new shares in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India," Vodafone said in a statement.



CNBC-TV18 had in August reported that the two telecom players are in exploratory talks for a possible merger.



The combined entity would have 43 percent revenue market share and have a 40 percent active subscriber market share, according to brokerage firm CLSA. The merged entity would account for over 25% of allocated spectrum and will have to sell about 1 percent to comply with spectrum cap norms, CLSA said.

The merger, if it goes through, will create India’s largest telecom player both in revenues and subscribers, taking on the likes of market leader Bharti Airtel and Reliance Jio. The latest entrant in the telecom sector, Reliance Jio, is fast acquiring subscribers on the back of free voice and data services under its Happy New Year offer.

Reliance Industries’ telecom subsidiary Jio acquired 72.4 million subscribers in the four months of commencement of services.

Nitin Soni, Director-Asia Pacific — technology, media and telecommunications — at Fitch Ratings, told CNBC-TV18 that there is a high possibility of a Vodafone-Idea merger over the medium-long term. In case of a successful merger, both companies will stand to benefit from lower cost of operations, he added.



Meanwhile, Former TRAI Chairman JS Khullar said the merger will also require a clearance from Competition Commission of India.

While Vodafone has a stronger base in metros, greater rural focus is Idea’s game.



Bharti chief Sunil Bharti Mittal had told CNBC-TV18 in Davos that such big moves require serious consideration. He didn’t rule out the possibility of a mega-merger. Although, the merged entity will be bigger than Airtel, he said. “This is not a race to who has got the highest revenue market share. It is a race to a profitably viable sustainable industry.”



Regulatory challenges

There are, however, regulatory hurdles on the mergers and acquisitions front that await Vodafone and Idea Cellular. M&A norms mandate that revenue market share of the merged entity should not exceed 50 percent in any circle. Also, the rules dictate that spectrum holding shouldn’t exceed 25 percent across all bands and 50 percent in each band individually.

Experts see a spectrum cap breach in at least 5 circles in the 900 MHz band. Besides, revenue market share of the merged entity will overshoot the 50 percent threshold in six circles.



Disclosure: Reliance Industries, which owns Jio, also owns Network18, which publishes moneycontrol.com