Vodafone has confirmed it is in talks to merge its struggling Indian arm with a rival, Idea, in an attempt to gain heft and better absorb the blow of a mobile price war declared by the sub-continent’s richest man.
The deal would combine India’s second and third biggest mobile operators to create one of the world’s largest, with nearly 400 million customers.
The move would represent a partial break with India for Vodafone. It said that it would accept shares in Idea in exchange for Vodafone India, which would be deconsolidated from its accounts, signalling the British company will cede control to Idea. Little or no cash is expected to change hands.
A Vodafone spokesman said: “There is no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction.”
If successful, the merger talks, confirmed after Idea shares spiked 26pc on Monday, would end hopes of a stock market flotation of Vodafone India. It has been mooted for over a year but held back by the upheaval in the mobile market caused by the entry of the petrochemicals billionaire Mukesh Ambani.
Mr Ambani launched 4G network Jio in September and has rapidly built up market share from scratch by offering free calls and internet access.
Vodafone’s plan to seek sanctuary comes after a bruising decade for the FTSE 100 giant.
It has invested more than £22bn and built a strong market position, but the business is valued at only around £6bn following a series of painful multibillion-pound write-downs. Vodafone India has also faced battles with a fickle political system over its tax affairs and the challenge of competing in an industry riven by corruption around radio spectrum licensing.
The £20bn giveaway has forced Vodafone and its rivals to slash prices to defend themselves.
Sources said earlier this month that Vodafone could seek a deal with Jio or Idea. The Indian press subsequently reported that Jio had rejected a tie-up to pursue organic growth.
Idea is listed on the Bombay Stock Exchange and controlled by the industrial conglomerate Aditya Birla Group. It has 188 million customers, just behind Vodafone on 203 million. Idea has also invested heavily to build its market position, and is now saddled with heavy debts that pose a mounting challenge as Jio lays waste to profits across the sector.
The operator has a market capitalisation of around £4.1bn, a few billion pounds short of the estimated value of Vodafone India.
However, Vodafone said it did not intend to include its £3bn stake in Indus Towers, a mobile mast joint venture with Idea and the number-one operator Bharti Airtel, in the merger. That could help assuage competition concerns that might arise from the deal, as the combined company would otherwise have a dominant share in Indus Towers.
Analysts said the combination of Vodafone India and Idea was also likely to breach limits on the share of the airwaves a single operator is allowed to own.
Allan Nichols, an analyst at Morningstar, said India was both the “upside and the risk” for Vodafone.
He said: "The firm’s subscriber growth has long exceeded our projections, but it has struggled to translate that growth into earnings and cash flow.
“Over the past two years, the market was beginning to recover from previous price wars, only to now see Jio start them again. We view this merger as a strong response.”
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