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Analysts: Vodafone India merger may trigger consolidation, new price war

? Deal may unleash further price wars and could reduce data costs by as much as 35%

? Merger is no silver bullet: Vodafone India needs to boost 4G and enterprise coverage

? Challenging time for smaller, debt-laden players

Consolidation is firmly on the cards for the Indian telecom sector as Vodafone UK's deal discussions add to hyper-competition in a crowded market of more than 10 operators.

The mobile giant confirmed Jan. 30 that its Vodafone India unit, the country's second-largest mobile operator, is in talks with India's third-biggest network, Idea Cellular.

If successful, the deal will create a new leader with a 43% market share and more than 390 million subscribers, overtaking current leader Bharti Airtel Ltd.’s 33% market share with 266 million subscribers.

"India is likely to become a heavily consolidated market controlled by three dominant players," Sanjeev Prasad of Mumbai-based Kotak Institutional Equities said in an interview.

"Barring the larger players, no one is adding any bottom-line growth at the moment," he added.

India is one of the world's fastest growing mobile markets, with Gartner estimating a 29.5% increase in smartphone sales last year.

However, its big three telecoms operators Bharti Airtel, Vodafone and Idea Cellular, have struggled ever since low-cost rival Reliance Jio sparked a price war with its free voice and data offers.

Aggressive pricing by Reliance Jio, a massive conglomerate owned by India's richest man, Mukesh Ambani, led to a surge in Vodafone's losses, to €5.39 billion after the operator took a €5 billion write-down on its India business.

The fact that India's telecoms industry has some of the lowest prices in the world makes it hard to make money on a nationwide basis, according to Tom Wells, London-based partner at M&A and corporate finance advisory Arma Partners.

Wells explained in an interview that remaining operators would either need to manufacture their own mergers to keep up or "bite the bullet."

In any case, the wave of mergers sweeping the global telecoms industry in recent years does mean consolidation in India would be long overdue.

"The world has already proven that three or four operators in large markets - and two in smaller markets - is the logical, economic outcome," Wells said.

Even so, reaching a deal with the India's number-three player is unlikely to provide a silver bullet for Vodafone's long-term prospects.

Sanchit Vir Gogia, chief analyst at Greyhound Research, said the announcement could unleash further price wars among telecom operators. He estimated that the pressure of such a deal on Reliance Jio and Bharti Airtel could force them to retaliate by reducing data costs for consumers by as much as 35%.

"With consumer mindshare and loyalty switching at the drop of a hat, telecom operators must focus on what truly matters; delivering [an] unparalleled customer experience," Gogia said.

As a result, the growing consensus is that any newly combined entity would still need a post-merger plan.

For a start, Vodafone needs to make up for its late entry into India's 4G market by boosting its coverage, said Jaideep Ghosh, COO at KPMG Management Consulting in India. Ghosh stressed that the operator would also need to beef up its enterprise business by targeting more corporate and government bodies.

"The merger alone will not necessarily put [Vodafone] back on a growth track or have a positive impact on profitability," Ghosh explained in an interview.

With more efforts needed to revamp growth at Vodafone India, a merger could also act as a buffer for competitive pressure around pricing until the market rationalizes to support higher tariffs.

However, this will take time and is unlikely to be "an overnight development," said Wells.

At the same time, as the market braces itself for a potential new industry leader, India's competitive dynamics make it a challenging time for smaller players to exit at a good valuation.

In December 2016, Norway's Telenor ASA is said to have held discussions about a sale of its India operations to Idea Cellular. The reported deal, in which the buyer would assume all liabilities and assets of Telenor India but without an actual payout, spells further bad news for smaller, debt-laden players scrambling for a deal.

"Combining operations will help to cut costs, but the trouble with these smaller players is none have much to offer except a lot of debt," Prasad concluded.