JIO COMES AND SHAKES UP THE SECTOR!

By Ruma Dubey

This is what the entry of Jio has done to the Indian telecom sector – consolidate to remain alive!

First, it was Bharti Airtel’s acquisition of Telenor and today, the BIG news is obviously Vodafone taking over Idea. Clearly, there is a big bout of consolidation happening; this had to happen the moment Jio started operations and then the back breaking price-war Ambani unleashed.

Todays deal is huge – Idea merging with Vodafone India and Vodafone Mobile Services. Let’s take a quick look at what this deal is all about:

• It will go on to create the largest telecom company of India with almost 400 million customers, 35% customer market share and 41% revenue market share.
• Vodafone will own 45.1% of the combined company after transferring a stake of around 4.9% to promoters of Idea for Rs 3,874 crore in cash concurrent with the completion of amalgamation.
• Promoters of Idea will hold 26% of the combined entity and the balance will be held by public.
• Implied enterprise valuation of Vodafone India stood at Rs 82,800 crore and Idea at Rs 72,200 crore.
• Idea will have the sole right to appoint the chairman.
• Kumarmangalam Birla will be the Chairman of merged Vodafone-Idea entity and both the companies will have equal stakes in the merged entity over a period of time.
• Vodafone India has spectrum in seven circles and Idea has in two, whose permits are expiring in 2021-22. The worth of this is together valued at around Rs.12,000 crore as per the last auction price.
• Once merged, the combined company  might have to surrender excess spectrum in as many as five circles in Gujarat and Maharashtra in 2500MHz band and in Gujarat, Kerela, Maharashtra, Haryana and UP (West) in 900MHz band, mainly to comply with antitrust norms.
• Board of combined entity will be comprised of 12 directors including 3 directors appointed by each of Vodafone and Aditya Birla Group.
• Vodafone’s impending plan to be listed on a stock exchange in India could be executed without taking the IPO route.
• There is a dagger hanging over Vodafone for long – it continues to have unresolved tax issues on account of the amended tax laws retrospectively; the contingent liability is placed at $2.5 billion.
• The entire process of merger to be completed by 2018.

Now post this merger, what could be the call on telecom stocks?

• There will be only five players – Bharti, Jio, Vodafone, Rcom and maybe the combined entity of BSNL and MTNL.
• The view remains cautious as over the next one year we could see competition and price wars heating up further.
• The merged entity would have to go through some integration pain over the next 12-18 months and this, plus Jio’s aggression could impact the bottomlines.
• The stock market has already priced in all the benefits of this merger for Idea and now price will move as per competition and integration. Jio has set itself a target of 50% market share by 2021 and that should scare the others in the sector.
• Best to remain a spectator in this sector for the next 6-8 months while enjoying benefits of price wars.
• One advice – if Jio announces plans to get listed, no rethink, go for it!