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According to Morgan Stanley, the merger will remove competition from the incrementally smaller players altogether for a better longer-term picture but the industry would become even more competitive.
It says that a possible merger of two of the top three operators could enable telecom operators to restructure costs, especially for future spectrum and capex. Regulatory hurdles would exist, which may compel them to trim some revenue and spectrum, but become stronger adds the brokerage firm.
As per CNBC-TV18 exclusive, country's third-largest telco Idea Cellular is said to be "exploring" options for a strategic deal with number-two player Vodafone India. It is learnt that both Idea and Vodafone are in exploratory talks that could conclude in a possible merger, a move that would result in a merged entity dislodging Bharti Airtel off its perch as the market leader. However, Idea Cellular has denied any such development.
So, if there is any merger plans in the offing here are three key challenges that the telecom players will have to face.
#1 Adjusted revenue market share
As per M&A guidelines (February 20, 2014), market share of combined entities should not exceed 50 percent in each of the service areas. If it does, the companies need to reduce it to the limit of 50 percent within one year from date of approval of M&A. As per Morgan Stanley estimates, combined entity of Idea and Vodafone would breach this norm in seven circles.
But it suggests that the companies can remove the lower average revenue per minute (ARPM) customers in a year and adhere to regulatory requirement.
Credit Suisse warns that merging companies may mean letting go off some of their strengths, though merger may be beneficial for the industry. "Breach of limits in these circles will require the combined entity to let go of some revenue market share (probably by taking up tariffs) and give up some spectrum (surrender some spectrum to government), " it says in a note.
#2 Spectrum limit
Credit Suisse says that combined entity would have a spectrum market share of 20 percent in India and the 3G/4G spectrum portfolio would largely be complementary and combined entity would have 3G/4G presence in 21/14 circles respectively.
"However in 3 circles, the combined entity would breach the 25 percent overall spectrum cap and would likely need to surrender spectrum to the government without any refund in exchange," it says.
Agrees Morgan Stanley that the combined entity would breach by 2.8 MHz in five circles in 900 MHz band but both Idea and Vodafone may sell this excess spectrum.
#3 Subscriber market share cap
Morgan Stanley says that Subscriber market share cap of 50 percent visitor location register (VLR) could be marginally breached in two circles – Kerala and Gujarat – by 1-2 percent.
Who gains, who loses?
Goldman Sachs feels industry consolidation may lead to increased pricing discipline for telecom companies but is negative for tower companies like Bharti Infratel, with tenancies at potential risk. Given existing footprints, a Vodafone and Idea entity would likely have a large amount of tower overlap, potentially leading to lower network operating expenditure and improved margins, in addition to faster rollout of coverage potential.
Both companies have been spending less on non-spectrum capex over the last two years than Bharti as FY16 net debt/EBITDA are currently 6.2x/3.0x for Vodafone/Idea.
Credit Suisse is cautious that while any consolidation in the sector is positive, Idea-Vodafone merger will not be an easy one given that there is significant overlap between the two. "In any case, potential consolidation will have to wait for the spectrum auctions to complete given that companies will be focusing on their spectrum bidding strategies and also because government has suspended any spectrum sharing/trading till the completion of auctions," it says.
It maintains underperform rating on Idea with target price of Rs 80 per share.
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