Vodafone and Idea Cellular today revealed that their $23.2 billion merger deal will gain from Capex savings of $2.1 billion in 4th year post-closure — amid indication that there will be job cuts in the telecom sector.
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Operating cost savings represent 60 percent of the expected run-rate savings.
How Idea-Vodafone to reduce costs
# rationalizing network infrastructure, generating operational efficiencies, lower maintenance expenses and savings in energy costs
# higher spectrum availability and single radio access network (RAN) deployment coupled with re-deployment of overlapping equipment from rationalized sites
# cutting down service centers, back office and improving distribution efficiencies
# streamlining IT systems and evolving to a single IT system
# cutting job for optimizing general and administration costs
Vodafone and Idea said the regulatory dis-synergies are primarily driven by spectrum liberalisation payments and requirements to meet spectrum caps and market share thresholds in certain circles one year. Spectrum liberalisation costs are expected to have a net present value impact of approximately INR 30 billion or $0.5 billion.
Industry comments
“Consolidation is a much anticipated and very welcome development in this beleaguered telecom sector. It will help bring in operational efficiencies and improved quality of service to customers. The regulatory regime will have to ensure that benefits of effective competition continue to be availed by customers,” said Arpita Pal Agrawal, partner and leader- Telecom, PwC India.
“Market consolidation is positive for the telecoms sector and the consumer. As operators grapple with excessive competition and pressurised margins, consolidation will help bring synergies and unlock greater cost efficiencies,” said Prashant Singhal, global telecom leader at EY.
Prashant Singhal said the consumers will benefit as the telecoms strategy will now pivot on innovation to offer value in terms of quality of service and content.
“This trend of mergers and consolidation, will, however, remain a positive development, benefiting customers, operators and the government in the long run on global lines,” said Rajan S Mathews, director general, Cellular Operators’ Association of India.
Rajan S Mathews has demanded a predictable, stable, long term, regulatory and policy environment, to ensure the financial health of telecom service providers and a conducive environment for continued investments for a fully connected and digitally empowered India.
Jio impact
Reliance Jio’s $25 billion investment and pricing strategy has significantly impacted the business conditions of Bharti Airtel, Idea Cellular, Vodafone, Reliance Communications and BSNL.
As part of a series of consolidation in the Indian telecom sector, there will be 4-5 telecom operators in future. First, Reliance Communications, MTS and Aircel will be under one entity soon. Tata Docomo may join this entity. Second, BSNL and MTNL, two state-owned telecoms are trying for a merger.
Third, Airtel has already acquired 4G spectrum from Videocon Telecom and Aircel. Airtel has already bought Telenor India. Airtel is in talks with
Fourth, Vodafone and Idea Cellular will be part of one entity soon. Fifth, Reliance Jio will be the other telecom operator.
Jio impact is prompting telecom operators to find new revenue streams. Jio is aiming to retain its 100 million customers, who joined the 4G network during the free offer, as paid customers post April 2017.
Fitch assessment
Fitch Ratings, On February 1, 2017, said merger between Vodafone Group’s Indian subsidiary and Idea Cellular should help them withstand intense price competition in the Indian telecom market, but is unlikely to lead to increased pricing power for operators in the short term.
Fitch expects the merger could improve the combined EBITDA margin by 250bp-350bp due to cost savings – mainly on network and marketing expenses. The combined entity will also have a more balanced subscriber mix, as Vodafone is strong in urban areas whereas Idea focuses more on the rural mass market.
Fitch estimates the merger would create an entity with 390 million subscribers, a leading revenue market share of around 40 percent, revenue of $11 billion – $12 billion, and an EBITDA margin of about 28 percent – 30 percent.
The merger will create opportunities for Capex savings by eliminating duplicate network investments and avoiding future spectrum auctions.
Fitch Ratings said 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 percent allowed by regulation.
Baburajan K
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