The combined entity of Vodafone India and Idea Cellular will have a more balanced subscriber mix, as the current second largest telco is strong in urban areas whereas the Aditya Birla Group telco focuses more on the rural mass market, ratings agency Fitch said in a note on Wednesday.
The proposed merger would also help both the telecom operators withstand intense price competition brought by Reliance Jio in the Indian telco market. The merger however is unlikely to lead to increased pricing power for operators in the short term, the agency said.
Fitch estimated that the merger would create an entity with 390 million subscribers, a leading revenue market share of around 40%, revenue of $11billion-$12billion, and an EBITDA margin of about 28%-30%.
The agency also said that the proposed merger would also create significant opportunities for capital expenditure (Capex) savings by eliminating duplicate network investments and avoiding future spectrum auctions, given the combined entity should have sufficient spectrum portfolio to expand 3G/4G services across 22 Indian regional markets – or ‘circles’.
An all-share merger along with a possible equity injection would strengthen the combined entity’s balance sheet and provide flexibility to invest in capex, Fitch said. According to Fitch, Idea Cellular’s balance sheet is stretched, with net debt/EBITDA of about 4.5x-5.0x.
The merger could improve the combined EBITDA margin by 250bp-350bp due to cost savings – mainly on network and marketing expenses, it added.
Fitch however noted that the planned merger could face regulatory challenges, as the combined entity would have more spectrum than regulations allow in five circles – this excess spectrum would need to be sold or surrendered to the government.
“The new entity may also have to cede some revenue market share in six circles, where pro forma revenue market share would be higher than the 50% allowed by regulation,” Fitch said.
The agency said that consolidation is “natural in an industry suffering from too many operators and a focus on price competition, and should benefit the industry in the long term.”
Fitch added that the recent entry of Reliance Jio is likely to ensure that price competition will remain very high for at least one to two years. “Reliance Jio‘s massive investment of $25 billion and unprecedented offering of free voice and data for six months have accelerated the pace of industry consolidation,” it said.
The agency said that weaker telcos have had to exit the market, and stronger telcos have had to rethink their long-term plans.
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