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Price war looms as Vodafone, Idea merger takes shape in India

Vodafone Group Plc is set to become India's largest operator once the merger between Vodafone India and Idea Cellular closes.

Vodafone CEO Vittorio Colao had said the merger with the Aditya Birla Group-owned operator would create a "much stronger asset" through a joint venture with equal rights rather than an exit opportunity for the group.

Upon completion of the deal, it 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.

Under the recently revealed merger agreement, Vodafone will own 45.1% of the combined entity, after transferring 4.9% of its stake to the Birla Group for 39 billion Indian rupees in cash.

Idea will own 26% and its other shareholders will own 28.9% of the combined company. The companies agreed to have an equal shareholding in the future, giving Birla Group the right to acquire more shares from Vodafone, according to a March 20 news release. Closing is anticipated in 2018.

Competitive pressure

Prior to the announcement of merger talks of the two Indian telcos in January, Vodafone's customer usage had been hit following the launch of low-cost rival Reliance Jio. Vodafone Group's losses more than doubled to €5 billion in the first half of the fiscal year that ended in September 2016, due to a write-down in the value of its Indian operations, a Nov. 15 report by the Press Trust of India said. Vodafone reported a 2.34 billion loss in the same period in 2015.

Meanwhile, Vodafone India's active data customer base for the third quarter ended Dec. 31, 2016, recorded a decline to 65 million, from 69.6 million in the previous quarter. The British mobile giant said its 3G and 4G customer base also decreased slightly.

CFO Nick Read admitted that the group "severely undermined" smaller players and their "ability to compete on price," but he maintained Colao's position that Vodafone would continue to view India as "an attractive long-term growth opportunity."

With the market consolidating as a result of competitive pressures, Vodafone is "well-placed" to be one of the few players of scale remaining, Read said.

Price war looms

For analysts, the merger may trigger a new price war.

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.

Tom Wells, London-based partner at M&A and corporate finance advisory Arma Partners, explained 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.

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%.

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.

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.