CASES IN MANAGEMENT 111
Idea- Vodafone merger – Can it be a game changer
Jayakrishnan S
In March 2017, Idea cellular decided to merge with Vodafone to create India’s largest telecom
firm. The merger of the second largest and the third largest telecom company is expected to
create the largest service provider in India. The debt-ridden entities expect the merger to
bring down the cost of operations and strategic move to address the cut-throat competition
from the current market leader- Airtel and disruptor- Reliance Jio. With Indian telecom sector
growing at a rate of 19.6 percent can the new entity change the market dynamics?
Idea
Idea is part of the Aditya Birla corporation which was established in 1995. The telecom service
provider has a network coverage in 4,00,000 towns and villages across the country with a
subscriber base of 202.06 million. It has a fibre network of over 1.5 lakh kms. The company
received the prestigious ET Telecom Award, 2017, for Best Enterprise Mobility Solution and
Golden Peacock Award for Corporate Social Responsibility in 2016 (Idea website). Idea is
among the top three mobile operators with an annual revenue of more than USD 5 billion in
2017.
Vodafone
Vodafone India is the wholly owned subsidiary of Vodafone group -UK which started its
Indian operations as VodafoneEssar by acquiring 67 %stake in Hutchinson Essar in May 2007.
In 2011, the company increased its stake to 74 % and the company was renamed as Vodafone
India limited (Previously Vodafone Essar Limited). In 2013, the Vodafone increased its stake
Copyright © 2018 Shri Dharmasthala Manjunatheshwara Research Centre for
Management Studies (SDMRCMS), SDMIMD, Mysore. This case is published as a
part of ‘Cases in Management Volume 7 (2018)’ with ISBN 978-93-83302-36-9.
The case writer(s) Jayakrishnan S, Assistant Professor - Marketing, SDMIMD, Mysore may be reached at
jayakrishnan@[Link] Author(s) have prepared this case as the basis for class discussion rather
than to illustrate either effective or ineffective handling of the situation. The case is related to a sector
and a specific company. The case is based on the information available in the public domain. This
publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without
the permission of SDMRCMS, SDMIMD, Mysore. For Teaching Notes please contact sdmrcms@[Link].
112 CASES IN MANAGEMENT
to 100% following Indian governments policy to increase Foreign Direct Investment (FDI) in
Telecom sector by 100 %. The telecom service provider has operations in 22 telecom circles
with a customer base of 210 million customers and revenue of more than USD 1.1 billion
during 2017-2018. The company was recognised as the Best Enterprise Service Provide - SMB’
award in 2016 from Frost and Sullivan. (Vodafone website)
Overview of Indian Telecom sector
India is the second largest telecommunications market with a subscriber base of 1.202 billion
in 2017 (IBEF,2018). The sector contributes 6.5 percent to GDP in 2017 and generates 4 million
jobs in direct or indirect manner. (KPMG, 2017). Indian telecom sector is highly pricesensitive
with majority being prepaid customers with low average revenue per user (ARPU)along with
the competition among the players have resulted in lower operating margins in this sector.
The revenue growth for the sector is approximately 7.31 percent and currently estimated to
be USD 20.4 billion. Telecom subscription is growing at the rate of 19.22 percent which is
considered as a positive sign for the industry growth.
Figure 1: Growth in Total subscribers (Source- IBEF,2018)
CASES IN MANAGEMENT 113
The cumulative revenue growth rate for the sector is 7.31 percent and valued to be USD 42.6
billion in 2017 (Refer Appendix Figure-1). One of the biggest challenges faced by Indian
Telecom sector is the increasing debt of the operators and constraints on achieving profitability
over the years. The entry of new players has made the sector more competitive.
Figure 2: Year-wise debt of the Telecom industry
(Source: Cellular Operators Association of India report)
Wireless segment dominates the Indian market which is about 98.04 % of the total telecom
subscriptions. Urban regions hold the majority share (58.04 %) of telecom subscriptions. The
wireless subscribers stood at 1,178.2 million in October 2017 (IBEF,2018). India is the second
largest smartphone market and is expected to have1 billion unique mobile subscribers by
2020. The wireless segment in 2018 is dominated by Bharati Airtel followed by Vodafone and
Idea. (Refer Figure 3).
114 CASES IN MANAGEMENT
Figure 3: Market share of service providers Wireless segment (2018)
(Source: IBEF,2018)
The fixed line segment is dominated by BSNL with a market share of 53.86 percent
followed by Airtel and Mahanagar Telephone Nigam Limited (MTNL) in 2018.
Figure 4: Market share of service providers – Fixed line segment (2018)
(Source: IBEF,2018)
CASES IN MANAGEMENT 115
The broad band market (Wired and wireless) is dominated by Reliance Jio with a market
share of 42.91 percent followed by Airtel (19.67 %), Vodafone (14.23 %) and Idea (9.12%)
[IBEF,2018]. One of the emerging trends in the industry is creation of telecom tower companies
to reduce operating cost and to improve the capital structure.
Merger – Can it make a difference
In a highly competitive telecom market, the merger of Idea and Vodafone is expected to
create telecom behemoth which will bring operational efficiency and profitability to these
two entities. Vodafone will have 45% of the stake followed Idea (26%) and rest by public
shareholders (Business line, 2017). But with an estimateddebt of INR 1200 billion (USD 17
billion) [Kant,2018] it will be a tough task for the merged entity to be profitable due to market
consolidation. The cumulative subscription base of the company is estimated to touch 400
million which makes it the largest telecom service provider in India and the most indebted
telecom company in comparison with its competitors like Airtel and Reliance Jio. Both the
companies (Idea and Vodafone) are constrained by lack of non-mobile revenues. The experts
suggest that the merged company need to make significant investment in improving network
quality, focus on segments, products and services which competitors have limited presence.
The merged entity will be the largest mobile phone operator. The priority area for the company
is effective cost-cutting measures for profitability. The steps taken by the company include
rationalisation of its distributors and tower networks, reduced advertisement spending and
marketing, a recruitment freeze and closure of redundant offices across circles. By
rationalisation of towers and networks, they can reduce the operational costs. The two
operators together offer services through more than 250,000 towers. So, tower rationalisation
at overlapping sites can add to cost reductions. One of the key areas in which the company is
focusing is to offer attractive price plans to ensure its brand attractiveness and regain the lost
market share. The new entity - Vodafone Idea Ltd can raise INR 5100 crore by selling the 11.5
% stake of Idea cellular in Indus (Telecom tower company) which is a venture between Aditya
Birla Telecom Ltd, Vodafone and Bharti Airtel (ET, 2018). The company feels that the series of
steps taken can reduce the debt to certain level.
116 CASES IN MANAGEMENT
Some of the key strengths of the merged company is the cumulative subscriber base of 39
crore which is higher than Airtel’s 27 crore and Reliance Jio’s 7.2 crore (ET, 2017). The market
share of the merged entity would be 40 % which is higher than its nearest competitor (Airtel)-
40%. The telecom sector is currently growing at a rate of 21.64 % for the past ten years which
is a positive sign for the merged company and industry (IBEF, 2018). But with increasing tariff
wars, debts, declining revenuesand spectrum license fee; whetherthe merger between Idea
and Vodafone will be a game changer or not in Indian Telecom industry.
References
Business line (2017, March 20), Vodafone and Idea will have equal stakes in merged entity
over a period of time, retrieved from [Link]
ET (2018, September 18), Vodafone Idea to merge Aditya Birla Telecom, retrieved from
[Link]
ET (2017, March 20), What the Idea-Vodafone merger means for telecom, Jio,employees &
you: 6 takeaways, retrieved from
[Link]
IBEF (2018), Telecommunications, p1 -52.
Idea (2017), Annual reports retrieved from [Link]
Kant, K. (2018, March 27), Rs 1,200 billion debt to weigh on Vodafone-Idea,may hit growth
plans, retrieved from [Link]
KPMG (2017), Accelerating growth and ease of doing business, p 1-25.
Vodafone (2018), Half Year Results reports retrieved from
[Link]
CASES IN MANAGEMENT 117
Appendix
Balance sheet – Idea cellular Limited -2017 (in Indian Rupee)
Source: Idea cellular Limited (2018)-Annual Report 2016-2017(In Millions)
118 CASES IN MANAGEMENT
Profit and Loss statement- Idea Cellular Limited-2018 (in Indian Rupee)
Source: Idea cellular Limited (2017)-Annual Report 2016-2017(In Millions)
CASES IN MANAGEMENT 119
Financial Summary – Vodafone India Limited- 2018 and 2017 (in Indian
Rupee)
OFCF- Operating Free cash flow
Source: Vodafone India Limited (2018)- Half Year results.
Telecom sector revenue in India (USD Billions)
Figure 1: Telecom sector revenue (Source: IBEF,2018)
120 CASES IN MANAGEMENT
