Introduction
Vodafone Case study describes the situation when Idea Cellular and Vodafone after the entrance of JIO. So, here is the Vodafone case study which describes the position of Vodafone and Idea Cellular before and post-merger, reasons for the merger, how did merger take place and critical analyses of the merger.
About Vodafone
Vodafone company came from the UK based Vodafone Group plc. It is a multinational service provider of telecommunications in 22 different countries as of 20th November 2020. And, in India Vodafone has its headquarter in Mumbai, Maharashtra. Vodafone is the third largest telecommunication provider in the country. Vodafone
At the beginning of the year, 1992 Vodafone started its company in India from Bombay(now Mumbai). After the entry of JIO in the year 2016. Afterwards, our Vodafone case study begins, Vodafone and Idea announced their merger in March 2017. And as of 31st August 2018, it is known as Vodafone Idea Limited.
Vodafone Idea Merger Case Study
Vodafone case study explains the reason and the situation of the merger of Vodafone and Idea. This merger was first announced in March 2017. Afterwards, in July 2018, the department of telecommunication gave the approval for the merger. Finally, on 31st Aug 2018, the merger was completed and it is announced as Vodafone Idea Limited.
And this merger was the largest telecom merger in India. As per this merger, Vodafone holds a 45.2% stake, Aditya Birla Group holds 26% and the remaining stakes were held public. So, to understand the Vodafone case study, let’s understand the reasons for the Vodafone Idea merger case study.
Reasons For Vodafone Idea Merger
So, while understanding the Vodafone case study lets us understand the reason for the Vodafone Idea merger.
- The main reason for the Vodafone-Idea merger is to Handel the rising dominance of Reliance Jio in the Telecom industry. As Jio announced to provide free services in the first 6 months. As a result, it started to capture the maximum part of the market.
- Secondly, the free services from the Jio started the price war between the companies in the telecom sector( as it in an oligopoly market structure).
- As a result in case of a price war merger brings confidence in companies with synergy benefits.
- At last, the combined entity of Vodafone and Idea was expected to hold a strong position in the industry. Such as in some circles it became the largest cellular service provider and in some circle, it was the second-largest after Bharti Airtel. So, a joined company can focus on being the service provider in pan India.
So, these were the reasons in Vodafone case study for the merger of Vodafone and Idea.
Vodafone Idea Integration
According to the past in the telecom industry, major telephone operators believes the merger is a strong tool to be in the lead position. As Airtel acquires the Telenor, it acquires the scope and business from other small telecommunication companies like Augere Wireless, Videcon, Tikona(4G Spectrum) etc.
Also, Reliance Communication (R Com) merged with Aircel and acquire MTC. Plus the Tata Telecom also started the process of merging with R Com. As a result in a period of seven months telephone operators numbers went down to seven from twelve.
Challenges
However, the announcement of the merger creates a negative image in the public, when the Vodafone and Idea merger was announced the Idea prices started to drop. And the share price of Idea declines from Rs. 97.70 on 20th March 2017 to Rs. 81.81 on 6th Sep 2017.
But the merger was important it gave support to the two companies, which were struggling to survive in the industry. Combined resources will help to compete with only the two biggest brands(Jio and Airtel).
So, these were the challenges of Vodafone and Idea merger in case of Vodafone case study.
Critical Analysis Of Vodafone Case
The merger of Vodafone and Idea in Vodafone case study gave higher stakes to the Idea promoters as compared to Vodafone. So, in long run, both companies can gain access to equal shares in the future.
Here are the few takeaways from the Vodafone Idea merger in Vodafone case study:
- The very first thing was the acquisition of 4.9 per cent shares of Vodafone by Aditya Birla. This would amount to a total of Rs. 3874 crore wherein each share is worth Rs. 108. This would be helpful in increasing the shareholding capacity of Idea to 26 per cent.
- While in the case of Vodafone case study, Vodafone holds 45.1 per cent of the shares in the merger, Idea would be allowed to buy another 9.6 per cent but at a cost of Rs. 130 per share in the period spread over the next four years. However, if Idea is unable to come up equal to the shareholding percentage of Vodafone, it can go forward and buy the number of shares required further but at the price prevailing in the market.
- And, the chairperson of the newly formed enterprise would be Kumar Mangalam Birla. On the other hand, Vodafone had appointed the Chief financial officer. As, after that new CEO was named under both the companies.
- Lastly, the promotors of both entities have the right to nominate three members for the board. Also, there are 12 members out of which 6 are independent on the board in the Vodafone case study of Vodafone and Idea merger.
Idea Positioning Before Merger
In Vodafone case study of Vodafone and Idea merger, now lets understand the Idea Cellular Limited is an Aditya Birla Group company. Founded in 1995, the company was incorporated as Birla Communications Limited and had a license of GSM-based services in Gujarat and Maharashtra Circle. In the following years, the organization started to expand its business with Tata Group, Birla and AT&T group of the US in joint venture form.
In August 2015, Idea announced the rollout of its 4G services. It was now competing with Airtel and Vodafone – in a non-monopolistic market. The company relaunched its “What an Idea” campaign taking 4G to the rural areas and empowering people through the usage of 4G services.
But in the year 2016 sudden announcement from Mukesh Ambani about Reliance Jio disrupted the Indian telecom sector. Below pie chart shows the market share of different telecom players before the entry of Jio.
As the Indian market is very sensitive towards price and Jio used it to make most of the profits. So, Jio started to make its all services free for the first six months. Afterwards, they made the services of voice calls, data extremely cheap. As a result, JIO captured a significant share of the telecom industry. Here is the pie chart of the post-Jio market share of various telecom players.
Vodafone Idea Merger
This transaction required various approvals from government authorities including SEBI, dept. of Telecom and Reserve Bank of India among others. The Department of Telecommunications (DoT) has given the green signal for the merger of Vodafone India and Idea in our Vodafone case study, the largest Merger and Acquisition agreement in the sector, which has displaced Bharti Airtel from top position after over 15 years. The approval conditions, which were given over a year after the agreement, were announced in March 2017 which included an advance payment of Rs 7,268 crore.
Idea Contributon
Promoters Aditya Birla Group infused Rs 3,250 crore in Idea Cellular, which separately raised Rs 3,000 crore ahead of a planned merger with Vodafone India. Following the equity infusion by Idea’s promoters, their stake in India’s third-largest telecom operator rose to 47.2% from 42.4% now. Idea contributed its assets which included standalone towers with 15,400 tenancies and a stake in Indus towers Ltd of 11.5%.
The entry of Reliance Jio Infocomm Ltd in September 2016, with free services for almost seven months and cheap tariffs, had eroded margins and impacted the revenue of rivals. The contribution of Vodafone will be Vodafone India along with standalone towers with 15,400 tenancies without including an 11.5% stake in Indus Towers. According to the agreement between Idea and Vodafone.
Vodafone will contribute more amount of net debt, about Rs 2,480 crore than Idea at the completion of the merger. Post-termination of both companies, the combined entity will be a joint venture between Vodafone and Idea in the Vodafone case study. Which will account for the under the equity method, controlled by both Aditya Birla Group and Vodafone.
Idea promoters hold the rights to acquire a 9.5% additional stake from Vodafone under the agreed deal to equalize shareholdings over time as per the following proposition
Vodafone: 45.1% – 9.5% = 35.6%
Idea: 26% + 9.5% = 35.6%
Impact of Merger on Telecom Industry
There are also several other implications that this merger of Vodafone case study will bring forth on the telecom industry.
1. Firstly, there can be initiatives based on the renewal of price discipline for the disruptive entry by Jio has caused some serious misbalance
2. Secondly, the poor financial health of the telecom sector can be observed. And through such mergers, there will be an infusion of health and life. Since India is the fastest-growing market in terms of subscriber base.
3. Through the merger, Vodafone and Idea will overcome their debts and a large sum of credit will be infused into the system
4. The deal has also saved both the telecom companies from selling off their business. As was being planned by them initially and this would directly impact the quality of services being provided by different players in the industry
The merger in the Vodafone case study will surely boost the pace of the telecom sector. It has also been found that the savings, synergies and also the spectrum will have a substantial impact on the escalating growth.
There will be a saving of over 60 per cent of the cost of the operation and this will aid in improving the quality and performance of the service through investments from the saved money.
Enhancement in network infrastructure will be observed while the operational efficiencies have a chance to reach excellence. Moreover, the revenue market share is expected to rise for all the locations and the spectrum of the entity would exceed the initial caps.