Vodafone India and Idea Cellular may soon become a single merged entity by the name Vodafone Idea Ltd, subject to government approval. The merger is expected give a new lease of life for both the companies by bring down their operations cost.
The Department of Telecommunications (DoT) has asked Idea Cellular to provide bank guarantees and payments to bear Vodafone India’s liabilities worth Rs 13,600cr before final approval for the merger is granted.
Effects of the merger on Indian telecom market
The Vodafone and Idea Cellular are currently country’s second and third largest telecom. The merger will make Vodafone Idea Ltd the largest telecom company in India pushing Bharti Airtel from the top slot, with Vodafone expected to own 45% while Idea Cellular will cash in with 26% in the merged entity.
The merger will play an important role in stabilizing the telecom market in India. The government feels the deal will settle the huge tariff war that has emerged post the introduction of Reliance Jio. It will also pave the way for reductions in margins these companies had to face due to competition. Industry experts are of the opinion that the Vodafone-Idea combined entity will save more than $800 million in operational expenditure in the next two fiscal years and will require another year to close the 4G network gap with Reliance Jio and Bharti Airtel.
DoT seeks legal opinion on the merger
DoT is seeking ASG’s opinion on whether the merger should be given a green signal without claiming the spectrum charges from either of the companies. The department is waiting for clarifications with regards to merger of Vodafone’s subsidiaries in 2015.
Post the clarification DoT is planning to prepare a demand notice to recover spectrum charges from both companies. It is expected to recover around Rs. 50 billion from Vodafone and around Rs 20 billion from Idea as spectrum charges.
Role of the government
The government is in no mood to compromise on the spectrum charges and other dues. It is fully prepared to challenge the companies in the country’s apex court. This is certainly a big concern to the parties involved in the merger as any kind of legal action opposing the government’s claim will further delay the merger surpassing their target of June which may potential costs them up to $10 billion extra expenditure.
– Pavan Mudholkar
Sr Research Analyst