Analysts divided over synergies of Idea-Vodafone merger proposal

Idea Cellular-Vodafone India's much hyped merger entered its final leg, but analysts are still divided over the benefits and synergies emerging from telecom's merger proposal that will create the second largest mobile telephone service provider by subscriber base.

  The fear stems from Idea's weak quarterly performance which bears the brunt of highly competitive environment post Jio's entry that triggered pricing war to retain subscribers at the cost of falling average revenue per user (ARPU).

  "Both Idea and Vodafone are more vulnerable to losing revenue market share during the merger transition to Reliance Jio," said Naval Seth of Emkay Global.

  Idea ARPU stood at Rs 105 this quarter against Rs 114 last quarter on higher bundle pack adoption as compared to Rs 132 in the second quarter.

  The Birla group firm received a solace in subscriber base rising to 195 million this quarter against 189 million and 182 million in third and second quarter respectively.

  Reliance Jio have been expected to remain aggressive in grabbing market share. Substantially lower 4G capacity, lack of pan-India 4G coverage, constant hit by rival's tariff plans and slower ramp-up on digital services is portraying Idea Cellular as a weak group to the investors.

  Few analysts, however, see benefits emerging from operating cost and synergies post merger.

  "Idea will benefit from operating cost and capital expenditure synergies post merger with Vodafone," said Sandip Agarwal of Edelweiss.

  Idea and Vodafone's data capacity utilisation at 78% (estimate) is high and they will have to accelerate capacity expansion, Agarwal added.

  However, he remained concerned about possible loss of market share.

  Brokerages across believed that Idea's stretched balance sheet due to sharp fall in ARPU is acting as a constrain and may create a hole in the merger plan due to which external funding is expected to become expensive.

  The merged Idea-Vodafone entity will have highest subscriber base of 410 million accounting for over 35% market share and second largest spectrum holding of 1,850 megahertz in the country.

  The debt of merged entity is expected to be around 1.1 trillion as per debt situation of Idea and Vodafone India at the end of September 2017.

  Synergies created from amalgamation might help eliminating the duplication of spectrum capacity and infrastructure related requirement.

  The Aditya Birla led telecom group recently reported losses for the sixth straight quarter, as it continues to reel under the pressure of tariffs unleashed by Jio.

  Idea management sounded confident on lower capital expenditure spends for the merged entity and said that for the merged entity going forward revenue market share trend and sustaining balance sheet leverage will be the key.