Birth of telecom giant

It will provide an opportunity to Birla, who will be the chairman of the new company, to withstand competition from an aggressive Reliance Jio, which made a staggering $25 billion investment and offered freebies to subscribers.

AuthorPublished: 22nd Mar 2017  1:47 amUpdated: 23rd Mar 2017  12:27 pm

The mega-merger of Kumar Mangalam Birla-owned Idea Cellular and Vodafone, making the new entity an undisputed market leader in India and second largest in the world, is set to redefine the dynamics of the telecom sector. With a combined subscriber base of 394 million, the new behemoth will edge out Bharti Airtel, which has 270 million subscribers, from the numero uno position and will lead to further consolidation in the telecom market. Clearly, the deal was spurred by the challenge from Mukesh Ambani-owned Reliance Jio whose disruptive business model has altered the telecom landscape in the country. Vodafone’s 204 million subscribers and Idea’s 190 million will give the new entity a combined market share of 35 percent and a revenue share of about 41 percent. Though Vodafone will hold 45 percent and Idea Cellular 26 percent stake in the post-merger company — being valued at $23 billion — they will have equal voting rights. The entire merger process is expected to be completed by 2018-end. Following Jio’s blitzkrieg, the telecom market has been witnessing intense competition with Bharti Airtel, Vodafone and Idea reporting quarterly losses. The merged entity would save an estimated $2.1 billion a year on operating costs and capital investments after four years. It will provide an opportunity to Birla, who will be the chairman of the new company, to withstand competition from an aggressive Reliance Jio, which made a staggering $25 billion investment and offered freebies to subscribers.

Jio’s strategy for growth is based on data-related services being made available at cheaper tariff on a faster communication platform like 4G. As a result, the existing players will come under pricing pressure and lower profitability, at least in the medium term. The consolidation in the telecom sector will help bring in operational efficiencies and improved quality of services for customers. The regulatory regime will have to ensure that benefits of effective competition reach the customers. At present, the high cost of spectrum acquisition, taxes and tariff war have severely impacted the revenue stream of the operators. With over 220 million users, India is now the second biggest market for smartphones and the price war being witnessed in the telecom space will benefit the customers. Going forward, a spate of mergers and acquisitions are expected in the sector as several small telecom players may prefer going for outright sale or exiting by selling off their spectrum once the spectrum trading guidelines are formalised. Airtel and Telenor are planning to merge their operations in the near future. The Idea-Vodafone merger is a welcome development, both from industry and customer point of view. It will lead to improvement of services and network and will ultimately benefit consumers.