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Vodafone to buy Idea Cellular? NSE seeks clarification after TV report

ideaThe NSE has sought clarification from Idea Cellular after television channel CNBC TV18 reported that the company was in preliminary talks with Vodafone to merge its operations.

“Exchange have advised the Company to provide clarification/confirmation on the news item in detail including the following: a) Whether such negotiations were taking place and b) Whether you/company are aware of any information that has not been announced to the Exchanges which could explain the aforesaid movement in the trading,” the NSE said.

The request follows a report in the TV channel to the effect that Idea Cellular is exploring options for strategic deal with Vodafone and are in “explanatory talks with a possible merger” at the end of the tunnel.

Idea’s sale has been much speculated upon every time there is talk of increased competition in the Indian telecom market.

The company, against all odds, has not only remained independent, but has has been the fastest growing in India for quite some time.

Last quarter marked a watershed moment for the Aditya Birla Group firm after it reportedly overtook Vodafone as the No. 2 data operator in the country.

Vodafone had been the strong No. 2 telecom provider in India for years, though Idea was always seen as the more nimble among the top three telcos.

It was widely speculated that Mukesh Ambani’s Reliance Industries would try to buy Idea, but Ambani chose to build a modern, all-IP network from scratch instead.

Idea Cellular and Vodafone are seen as weak competitors to Bharti Airtel and Reliance Jio due to their focus on and dependence on voice services.

Going forward, it is assumed that data will play a more prominent role in Indian telecom and players who get most of their revenue and profit from voice will face tough times.

Idea has been more aggressive in chasing the data opportunity of late compared with Vodafone. The Aditya Birla Group firm, for example, is estimated to have several times the total number of 4G towers compared with Vodafone. It also has nearly twice as much 4G spectrum as Vodafone, a wholly-owned unit of the namesake British company.

Vodafone has earlier sent signals that it could look at Idea as a potential acquisition target.

Back in February, the company’s India head Sunil Sood said in an interview that “it was cheaper for him to buy my biggest rival than buying 10 MHz of 700 MHz,” remarking on the high spectrum prices.

As of yesterday, Idea Cellular had a market capitalization of less than 35,000 cr, while the starting price of one block (5 MHz) of 700 MHz band spectrum in the upcoming auction is around Rs 57,000 cr.

Idea’s shares have jumped 7% on the news that the British company could be exploring a merger.

As is the case with most such deals, the transaction is likely to be structured as a share swap, and could also pave the wave for an reverse listing of Vodafone India on local stock markets.

Idea Cellular was itself born of several such mergers. It was born of the merger of some of Birla’s, AT&T’s and Tata’s telecom businesses in India.

UPDATE: The company denied the report and said the news item is “absolutely untrue and preposterous.”

POTENTIAL COMPLICATIONS

The deal will not be an easy one to consummate due to India’s strict policies on market share and spectrum holding.

No single company, for example, can hold more than 50% of the spectrum in any single band, while in states like Kerala, Vodafone and Idea together hold 100% of the most lucrative spectrum, the 900 MHz band.

Reliance Communications, which is in talks to take over Aircel Cellular’s mobile operations, also ran up against such roadblocks, though the two are much smaller companies.

Aircel, however, was quick in disposing off its assets such as spectrum before the deal to facilitate the take-over.

Besides spectrum cap issues, a merger would pose major difficulties for the two companies in at least five circles, where the merged entity would end up with over 50% of the total market by revenue. In two-three circles, the combined entity would have over 50% of the total active subscribers as well, which is also prohibited according to India’s M&A guidelines.

As such, it has always been speculated that any merger involving two of the top three operators will be of the nature of a strategic tie-up rather than an all-out merging of capital.

For example, Vodafone, Idea and Airtel had intracircle roaming pacts — effectively allowing their subscribers to tap into any network without excess charges — for 3G services for several years until Airtel dropped out of the alliance after buying spectrum.

An intra-circle roaming and network sharing agreement is seen as a more likely outcome of the talks compared with an all-out merger, though the possibility of the latter cannot be denied totally.

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