Idea Cellular and Vodafone could achieve cost synergies of Rs 84 billion and Capex synergies of Rs 56 billion within 3-4 years of the merger, said UBS Securities, in its research report on the India telecom industry.
“In our pro-forma estimates, we assume steady state Opex savings of Rs 76 billion, slightly below management target, with combined entity’s EBITDA margins reaching 39 percent by FY22E vs 40 percent for Bharti Airtel’s mobile India business,” said UBS Securities.
Its analysis of ost structure highlights network Opex comprises by far the largest cost component and with ~20 percent sites possibly up for removal, the savings in terms of tower lease and utility costs are expected to be significant.
“In markets such as Thailand, Indonesia, we see a clear 5-10ppt margin advantage for telecoms with 5-10 percent market share advantage, showing the operating leverage in the business,” said UBS Securities.
European M&A examples have shown 10-15 percent of total costs can be reduced.
Idea has FY18E EV/EBITDA of 10.3x on a standalone and 9.3x on a pro-forma basis (pre-synergies). Using FY20E EBITDA estimates, Idea’s pro-forma EV/EBITDA comes to 6.9x including synergies. This compares to Bharti’s FY20E EV/EBITDA of 5.7x.
Idea and Vodafone will be the largest mobile operator in India with an estimated revenue market share (RMS) of 41 percent — said UBS Securities in its analysis using data for December 2016.
Roughly 15-20 percent Opex and Capex savings are possible once the merger is finalized.
Network duplication is key
The biggest synergies will be derived from network Opex as both companies have indicated that as many as 20 percent sites are duplicated and can be eliminated.
Network opex: As much as 15-20 percent of the combined companies’ network Opex can be reduced as network integration is completed (likely 2-3 years after the closing of the merger).
Idea has ~134,000 sites and Vodafone has ~140,000 sites. Both could eliminate 55,000 – 60,000 sites post merger. Bharti currently has 160,000 sites, implying mobile revenue per site of Rs 3.5 million for Bharti vs Rs 2.6 – 2.7 million for Idea and Rs 2.7 – 3 million for Vodafone.
Assuming the elimination of 20 percent of sites, Idea-Vodafone can reduce network Opex by 15-20 percent, generating revenue per site of Rs 3.4 – 3.6 million, almost comparable to Bharti Airtel.
Idea-Vodafone indicated Rs 133 billion of one off costs associated with integration to be incurred during FY18-20E.
G&A and fixed costs: G&A, employee related and other fixed costs for Idea have declined by ~100bp since FY13, while for Bharti Airtel these costs have come down ~300bp, showing operating leverage in the business. Functions such as finance, legal, marketing can be centralized and sizeable duplication can be avoided.
15 percent of combined entities’ G&A can be reduced due to above removal of duplication.
Sales, marketing and customer acquisition: While savings in sales and marketing will be dependent on how the brand integration is managed, costs associated with distribution of SIM cards etc can be reduced. 15 percent of combined entities marketing and subscriber acquisition costs can be reduced.
Capex: The combined entities’ spectrum holdings is almost 2x compared to Idea alone, in the 1800MHz band, which is the core 4G spectrum.
Idea-Vodafone mentioned that spectrum harmonization, widening of spectrum bands and removing guard bands in certain cases will help the combined entity expand data network capacity many-fold without much incremental Capex.
Given the inverse correlation between spectrum and Capex, there will be Rs 53 billion of cumulative Capex savings between FY19-22E. The combined company’s Capex to sales will be at 12-13 percent, which is 150- 200bps lower than for stand-alone.
