Voda CEO says joint venture will have scale needed to offer consumer choice in fiercely-competitive market.

Following weeks of negotiation, Vodafone India and Idea Cellular on Monday reached an agreement to merge their operations into a $23.2 billion (€21.57 billion) joint venture.

The combined entity will serve 395.2 million customers, according to the latest figures from the Telecom Regulatory Authority of India (TRAI), putting it ahead of current market leader Bharti Airtel, which has 265.9 million customers. The venture will also hold 1,850 MHz of spectrum. However, it is expected that Vodafone and Idea will have to make divestments in order to obtain regulatory approval for the deal.

Vodafone and Idea expect the deal to generate $10 billion worth of cost and capex synergies after integration costs and spectrum utilisation payments, with estimated annual run-rate savings of $2.1 billion by the fourth year after the transaction closes.

"The combined company will have the scale required to ensure sustainable consumer choice in a competitive market and to expand new technologies – such as mobile money services – that have the potential to transform daily life for every Indian," added Vodafone CEO Vittorio Colao.

Scale and synergies have become paramount for Indian operators after Reliance Jio shook up the market in September with the launch of free nationwide voice and data services. The operator is due to start charging for services from the beginning of April, but its pricing strategy is still extremely competitive.

For example, customers will have the option to pick the best-selling tariff offered by any rival operator, and Jio has promised to match the price but include 20% more data.

"Consolidation in the sector is inevitable, as network and cost synergies are desperately needed to ensure long-term survival, as we can expect the tariff war to continue," said said Nick Jones, head of TMT at Cavendish Corporate Finance, in a research note.

Indeed, Reliance Communications is in the process of merging its mobile business with Aircel. Meanwhile, Telenor is heading for the exit, having agreed in February to sell its Indian operation to Bharti Airtel.

Under Monday’s deal, Vodafone will initially be the venture’s biggest single shareholder, with a stake of 45.1%. Idea Cellular parent Aditya Birla Group will hold 26%, while Idea’s other shareholders will own 28.9%.

Aditya Birla has the right to acquire more shares from Vodafone as part of an agreement to equalise their respective stakes. If their shareholdings are not equal after four years, Vodafone will sell down its stake for the five years afterwards. Until equalisation is achieved, the voting rights of Vodafone’s additional shares in the venture will be restricted.

The merger ratio implies an enterprise value for Vodafone India and Idea of $12.4 billion and $10.8 billion respectively.

Before the deal completes, Vodafone and Idea intend to sell their standalone tower assets; Idea will also sell its 11.15% stake in towers business Indus Towers, a company in which Vodafone has a 42% stake. Vodafone said it will explore its strategic options for its Indus stake, including a full or partial sale.

Vodafone and Idea will also work up a new brand that aims to "leverage customers’ affinity for both existing brands," Vodafone said, adding that the name will be changed in due course.

"This landmark combination will enable the Aditya Birla Group to create a high quality digital infrastructure that will transition the Indian population towards a digital lifestyle and make the government’s Digital India vision a reality," declared Kumar Mangalam, chairman of Aditya Birla Group.

Vodafone and Idea expect the deal to close during calendar 2018, subject to customary approvals.

In order to secure those approvals, it is likely that Vodafone and Idea will have to divest certain assets, including spectrum.

Under India’s telco regulations, no single player can have more than a 50% share of revenue and subscribers in a given telecom service area, or circle, as they are called in India. Telcos are also restricted to holding no more than 25% of available nationwide spectrum, and 50% in any one circle.

Hong Kong-based brokerage CLSA said in a recent Economic Times report that a merged Vodafone and Idea would breach revenue and subscriber market share, and spectrum caps, in five circles.