Vodafone in talks to merge India unit with Idea Cellular

[MUMBAI] Vodafone Group Plc is in discussions to merge its Indian unit with Idea Cellular Ltd in a deal that would create the country's largest cellular carrier and ease a worsening headache for chief executive officer Vittorio Colao.

The talks with Idea controlling holder Aditya Birla Group could lead to Vodafone splitting off its Indian business into a separate entity, Vodafone said Monday in a statement. Aditya Birla and Vodafone would have equal rights in the new company, Idea said. Idea rose as much as 29 per cent, the most since the shares began trading in 2007, bringing the company's market value above US$5 billion. Vodafone gained as much as 4.1 per cent.

The all-stock deal would reduce Vodafone's exposure to its troubled Indian business, after the carrier was forced to pump more than US$7 billion into the unit and write down its value by more than US$5 billion. Carriers in India are seeking to consolidate after Reliance Jio Infocomm Ltd, controlled by billionaire Mukesh Ambani, India's richest man, introduced free services undermining industry revenue.

"India needs consolidation - there's just way too many operators there and that's prevented any of them from ever making the kinds of money that they'd hoped for," said Allan Nichols, an analyst at Morningstar Inc in Amsterdam.

For Vodafone, "India has higher growth rates and it's always done well at adding subscribers, but it's never done a good job at bringing that to the bottom line."

A deal isn't certain, nor are the terms or timing of any transaction, Newbury, UK-based Vodafone said.

Vodafone's Indian unit is the No 2 carrier in the country and Idea is the No 3. A merger would create an operator with 387 million subscribers, a 36 per cent market share and airwaves for faster 4G services spanning the entire country. Vodafone would also gain a listing in India, which it has been considering since at least 2011. Vodafone said that the deal wouldn't include its 42 per cent stake in Indus Towers.

Potential risks to the deal include a breach of spectrum limits that could force the merged entity to sell off valuable airwaves in a few circles, according to a report by Sanford C Bernstein & Co. The merged entity would have net debt of about 718 billion rupees (S$15.184 billion), based on reported borrowings.

Vodafone advanced 2.9 per cent to 198.9 pence at 10.43am in London after rising as high as 201.25 pence, while Idea gained 25 per cent to 97.70 rupees in India. Bharti Airtel Ltd, India's largest carrier, also surged.

Prior to Jio's entry, Airtel, Vodafone and Idea were able to increase revenue and profit, even as they borrowed heavily to pay for spectrum and infrastructure. Jio, which stormed India's crowded cellphone market with free voice calls for life, has spurred rivals to cut prices and expand their mobile broadband networks.

A merger of Vodafone's India business and Idea would lead to economies of scale and significant savings on spectrum for the new entity, Saeed Baradar, a telecoms sales specialist at Louis Capital Markets UK LLP, said in a note.

Still, Vodafone separating its Indian unit would mean it is no longer consolidating a business that had a disproportionate impact on growth of earnings before interest, taxes, depreciation and amortisation and free cash flow, Baradar said.

Mr Ambani plans to invest a further 300 billion rupees in Jio, in addition to over US$25 billion already invested in the carrier, to expand the network coverage and capacity, it said in a stock exchange filing this month. In December, Jio announced that it would offer data for free until March 31, extending its free trial period by three months. Airtel, which reported a 55 per cent drop in quarterly profit Jan 24, said that "predatory pricing" was hurting the industry. India's Telecom Disputes Settlement and Appellate Tribunal will hear a case Feb 1 that Airtel filed against the nation's telecom regulator for allowing Jio to continue its free services.

Aditya Birla Group entities, including Aditya Birla Nuvo Ltd., own 42.2 per cent of Idea, according to the company's website. Malaysian carrier Axiata Group Bhd has a 19.8 per cent stake. Vodafone India Ltd is a wholly owned unit of Vodafone.

BLOOMBERG