The primary benefits expected from the merger of Vodafone India and Idea Cellular — the country’s second and third largest telecom operators, respectively — of a continued response to aggressive tariffs and improvement in network quality, could be limited for the time being, experts have said, pointing out that the leveraged balance sheet of the merged entity could push it to save costs in the short term. The Department of Telecommunications (DoT) on Thursday granted its final approval for the merger, which will create India’s largest telecom company, dislodging Bharti Airtel from the top position. The companies have paid close to Rs 7,000 crore to the government in cash and bank guarantees, upon which the approval was conditional.
Despite the large nature of the combined entity, which will have close to 42 per cent market share in mobile subscriber market and nationwide 4G spectrum footprint, sector analysts are of the view that the nearly Rs 1-lakh-crore debt of the merged company could push it to save costs by operationalising synergies, while responding to the pricing pressures. This could limit the company’s capability to spend on infrastructure expansion. “With a highly leveraged merged company balance sheet, we expect the new management to focus more on cost cutting than market share retention…the management had guided to ~Rs 84 billion (Rs 8,400 crore) in annual cost savings by the fourth full year of operations. Now, some of the operating costs are linked to revenues (licence fee, spectrum usage charge, sales commissions), while some others saw a reduction due to regulations (cut in interconnection charges),” a note by Credit Suisse said.
The merged entity is also expected to reduce its costs in terms of rationalising tenancies at towers. Bank of America Merill Lynch (BoFA-ML) pointed out in a report that there are 73,000 overlapping sites, adding that the companies should start removing the overlapping 3G and 4G equipment, while freeing up its 2G spectrum to enhance the 4G network. This could result in better quality data services from the merged entity. “…the redeployment of overlapping 2G/3G equipment in the rural areas amounts to Rs 40 billion (Rs 4,000 crore) in capital expenditure, per management. This redeployment will likely help Idea/Vodafone generate 12 petabytes of additional capacity…,” BoFA-ML said.
While the company, which will be renamed to Vodafone Idea Ltd, plans to continue operating under different brands – Vodafone with a stronger footprint in metros and category A circles, and Idea with a wider reach in smaller regions – taking away the opportunity to reduce marketing costs. “Similarly, savings in terms of employee costs are expected to be limited. Hence, operational expenditure synergies will need to come from network and IT only,” HSBC Global Research said. The merger is seen resulting in around 5,000 job losses, a number disputed by Vodafone earlier.