|Idea dials Vodafone|
|Tuesday, 31 January 2017 03:49|
Smart not to burn cash and strain other group firms
If Kumar Mangalam Birla appears to have thrown in the towel by offering to merge Idea Cellular with Vodafone, this is because operating on one’s own is not just prohibitively costly or debilitating, but perhaps even suicidal. Birla has chosen to team up with Vodafone despite the costs – the merged entity must return scarce spectrum in five circles thanks to Trai-spectrum-caps and will have to fork out Rs 2,000-Rs 3,000 crore by way of spectrum liberalisation charges – and must have good reason to do so. Indeed, with Reliance Jio threatening to continue with its near-free service offering beyond March there is the real risk of a big cash-burn which Idea cannot afford given it is already highly leveraged with a net debt-to-ebitda at close to six times based on FY17 earnings. Idea would need to invest $2-$3 billion in the next couple of years merely to stay competitive. And straining the finances of other group companies would not be the right thing to do.
On paper, the merger will catapult the new entity to the top slot with a revenue market share of 43% compared with 33% for Bharti Airtel; it helps that Vodafone is strong in urban areas while Idea has a stronger footprint in rural India. It would end up with the leading subscriber-share in 13 circles, breaching the Trai subscriber-cap in one circle and the revenue-market-share-cap in five circles. That, however, should not stop the Competition Commission of India (CCI) from blessing the marriage. The merger is the outcome of an onslaught by Rjio, which thanks to the financial resources at its disposal, has been able to launch its services at a nominal cost. This newspaper has argued that this is in the nature of predatory pricing and perhaps the government should have put in some pricing restrictions like it has for e-tailers despite their very limited market presence. Indeed, one could argue that within the realm of market-share, there is a concept of relevant-market, and although RJio might not have too many subscribers for the voice piece, its presence in the data segment is relatively high. Trai, however, has not seen it that way, allowing RJio to continue with its offering beyond the initial three months.
Indeed, CCI must view the merger, not from the narrow perspective of what market shares telecom companies command today, but in the broader context of how the finances of players will be impacted by the presence of a very deep-pocketed entrant like Reliance Industries and how this ensures a very competitive market-place. Mobile telcos are already hugely indebted thanks to the high cost of spectrum, and bankrupting them will really hurt the banks. Indeed, smaller players are likely to rush for the exit while Vodafone and Idea try to seal their match. Both Trai and CCI should facilitate consolidation since this is what the industry needs to survive – indeed, outdated market-share-based spectrum caps also need urgent reviewing. At the end of the day, telcos need to be allowed to grow their profits which can be ploughed back into networks. It is the regulator’s duty to ensure the system stays healthy; if it needs to change the rule-book, it must do so.