Vodafone Merger in India

Rival telecommunications companies Vodafone Group Plc and Idea Cellular Ltd. agreed to a merger in India that is expected to finalize in 2018. This decision arose from the intense price war in the world’s second-largest mobile phone market, and this larger operator will have 395 million subscribers, more than market leader Bharti Airtel Ltd. Due to extreme competition in the country, Idea lost money last year for the first time in ten years. Vodafone faces similar struggles with profitability, but four years from the agreement, the merger will save $2.1 billion per year on costs and investments. The $23.2 billion deal values Vodafone India at $12.4 billion and Idea Cellular at $10.8 billion.

Vodafone’s expansion over time as a holding company allows it to relinquish partial control of its most troubled assets. The merger helps redeem the company’s expensive “bet” on India, which saw it continue to decrease in value and accumulate debt, by moving an unprofitable business off its balance sheet and providing potential for growth. Competitors will most likely follow in the footsteps of Vodafone and Idea, because “the logic behind telecoms mergers is indisputable. In effect mobile telecoms is infrastructure and the winner in such a market is the business with the greatest market share. They can put the biggest volume of users through their infrastructure, which is effectively fixed cost, minimizing cost per user.”

Vodafone CEO Vittorio Colao believes that this merger will trigger mobile network growth in India. He thinks the new network will bring strong 4G networks to more locations throughout the country and revolutionize “Digital India”. He says, “this is a transformational deal that changes, at the same time, the prospect and future of Vodafone and Idea in India, but also the industrial structure in India.” Due to the size of the new company, new technologies can be explored without the risk of losing too much money. Mobile money services and other technologies can now come to India and make life easier for its citizens.

Sources:

https://www.bloomberg.com/news/articles/2017-03-20/idea-cellular-approves-india-mobile-phone-merger-with-vodafone

http://www.reuters.com/video/2017/03/20/vodafone-idea-in-23bln-indian-merger?videoId=371329588

 

11 thoughts on “Vodafone Merger in India

  1. It seems that the central takeaway from this blog post is that, while two money-losing companies almost always combine to create one larger money-losing company, exceptions are found in industries that use common infrastructure to provide the same service. Additionally, another requirement seems to be that there is an equal fixed cost per user in each industry. Ultimately, I am sure other variables (for instance, in this particular example, destruction of infrastructure by poor weather conditions) affect the profits of these businesses.

  2. India’s business market is something I know really little about, but the time tested theory that mergers usually don’t end up well is one that continues to be upheld by examples. I am not also sure of consumer preferences in India, but if smartphone usage is extensive there, then obviously a stronger 4G network is preferable. Based on population alone, the success of a big player like the company discussed above means that it should have every opportunity to achieve critical mass in their strategic implementations.

  3. I think that it is kind of funny that the Vodafone CEO provided a little excerpt about how beneficial the merger will be for consumers, when we all really know that it is taking place in order to increase potential profitability. It may be true that Vodafone and Idea customers may have better service in the future, profitability is really what is at stake here.

    • Wouldn’t any CEO say that though? A quote like: “both companies are currently losing money so we think this merger is a good idea because it will help us become profitable,” would be idiotic for a firm to say. Similar to Childress’ comment above, I could see this merger actually working due to similar infrastructure. If this merger really does help bring stronger networks and to more places then this might not be a usual merger that ends poorly. Also, if this does happen to be the case, then the consumer is indeed better off.

  4. Certainly this stands to benefit Vodafone as mentioned above, so how much incentive does the company have to develop and bring technologies to India that would enhance a consumer’s experience with potential 4G networks? Will Vodafone and Idea Cellular actually have the necessary means to develop the proposed new systems together, or is it simply a marketing ploy? If through merging, they jointly have the largest market share of any cellphone company in India and are thus able to change the scene for cellular networks in India, then they will absolutely reap the benefits and make it difficult for any company to unseat them as the dominating market force in the cellphone industry.

  5. I am curious to see how much the new company will raise rates due to the higher amount of market and pricing power it will have after the merger. How will the rest of the remaining players in the industry respond?

  6. Is there any indication that Chinese telecom giants might choose to attempt an expansion into India? Companies such as China Mobile and China Telecom have achieved a fairly successful oligopoly in China, India seems like it would be the next logical stepping stone for telecom corporations looking to expand into larger markets (government restrictions aside).

  7. While we know that the theory behind mergers suggests firms will lose valuation if merging for pure market power. Based on statistics from https://www.statista.com/statistics/467163/forecast-of-smartphone-users-in-india/ – smartphone usage is expected to increase by nearly 200 million in the next 5 years. Therefore it will be interesting to see whether or not this merger will be able to take advantage of the already large, and rapidly growing smartphone market – and defy the theory that market power mergers leads to lower valuation.

  8. The current growth rate of India’s population plus the technological advancements that seems to have diffused into more of the population makes Vodafone’s gamble a particularly interesting one. While time after time mergers seem to fail or not reap the benefits expected, I imagine India might be a distinct case in that it has a high population growth rate (though it’s slowed in recent years) and it is one of the fastest growing tech hubs in the world. These conflating factors may lead Vodafone to success previously not experienced.

  9. I will be interested to see if the company created by the Vodafone merger is actually able to maintain the savings that they claim especially if their competitors follow suit with similar mergers to increase their profitability. Another speculation I had is that many smart phone companies seem to be experiencing slowing growth recently. I wonder if this slow in growth will this continue until the next major innovation occurs because there is not as much demand for the product when everyone already has one.

  10. This merger could lead to integration issues that divert management attention away from market dynamics. Recent reports show that while EBITDA margins have improved lately, the joint venture is still reporting net losses. Their competitor Reliance Jio, which introduced free calling and data services, has been making enormous investments in the sector, and as a result has driven down the profits and cash flow of incumbents. Both Vodafone and Idea Cellular are behind in investments. The success of this merger is ultimately dependent on whether or not the company can adopt an effective and efficient organization structure; this may be a challenge in a merged company that has two large investors with equal rights.

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