British mobile phone giant Vodafone will merge its Indian unit with Idea Cellular (BSE: 532822.BO - news) to create India's largest telecoms operator, the firms said Monday, as they combine to fight a price war sparked by the country's richest man.
The confirmation ended months of speculation that the two operators were ready to sign a deal to help fend off the Mukesh Ambani-backed Reliance Jio, whose recent arrival has shaken up India's ultra-competitive mobile network market.
"Vodafone Group Plc (NasdaqGS: VOD - news) and Idea Cellular today announced that they have reached an agreement to combine their operations in India," they said in a statement to the Bombay Stock Exchange (BSE).
"The combined company would become the leading communications provider in India with almost 400 million customers, 35 percent customer market share and 41 percent revenue market share," the statement added.
Jio launched in September with an audacious free service for the rest of 2016, followed by vastly cheaper data plans and free voice calls for life, forcing rivals to dramatically slash their tariffs.
It also left competitors scrambling to match the deep pockets of Jio, which is backed by India's hugely wealthy energy-to-chemicals conglomerate Reliance Industries (BSE: RELIANCE.BO - news) , and caused a rush towards consolidation in the multi-billion-dollar sector.
Shares (Berlin: DI6.BE - news) in Idea initially soared following the announcement but then tanked to close down more than nine percent, with reports saying investors were worried the deal undervalued Idea.
Vodafone will hold 45.1 percent of the merged entity after it transfers a 4.9 percent stake to Idea backers for 39 billion rupees ($579 million) in cash.
Idea will hold 26 percent in the combined company and the merger will take up to two years to complete. The agreement excludes Vodafone's 42 percent stake in Indus Towers.
- Market consolidation -
The merged firm will be worth $23.2 billion, based on the combined enterprise value of $12.4 billion for Vodafone India and $10.8 billion for Idea Cellular, according to Bloomberg News.
The companies will nominate three directors each, the statement said.
Global brokerage firm CLSA has estimated that the tie-up would command a revenue market share of 43 percent by the start of the 2019-20 financial year, ahead of Airtel on 33 percent. Jio would have 13 percent.
Indian telecoms analyst Baburajan Kizhakedath said the two companies would make savings by merging but would come under pressure to reduce tariffs.
"The merged entity will not be able to withstand pressure from Jio because both Vodafone and Idea Cellular are not seen as aggressive as Jio and Bharti Airtel," he told AFP.
The announcement is the latest move towards consolidation as telecom companies in India scramble to shore up their status or cut their losses and run in the face of Jio's price war.
Norwegian multinational Telenor (LSE: 0G8C.L - news) announced last month that it was selling up to Airtel, saying the amount of money needed to be competitive in the multi-billion-dollar sector would not offer an acceptable level of return.
The withdrawal came after Videocon Telecom told subscribers in January that it planned to cease operations and pull out of the market. Aircel and Mobile TeleSystems (MTS) have sold up since the beginning of 2016.
Reliance Communications (BSE: RCOM.BO - news) (Rel Comm) -- owned by Ambani's younger brother Anil Ambani -- purchased Russian conglomerate Sistema's Indian telecoms business, branded MTS, last year and is in talks with Tata Teleservices to join forces.
There were a dozen telecoms companies battling for Indian customers in 2010 but industry watchers say they expect that soon there will be only four ventures.