Vodafone confirms talks to merge Indian business with Idea

Vodafone has confirmed it is in talks over merging its struggling Indian business with Idea Cellular, which is part of the Aditya Birla Group.

The FTSE 100 telecoms group made the announcement on Monday, following recent speculation in the media about a combination of Vodafone India and Idea amid fierce price competition in the country.

Vodafone had been planning to float Vodafone India on the Mumbai stock exchange.

On Monday it said all-share merger of Vodafone India, excluding the UK company's 42% stake in Indus Towers, was under discussion with Aditya Birla Group, which would see it issue of new shares in Idea to Vodafone and would result in Vodafone deconsolidating Vodafone India.

It stressed that there was no certainty that any transaction will be agreed, nor as to the terms or timing of any transaction.

The Indian mobile market has broken out in a price war since September with the launch of newcomer Jio, founded by billionaire Mukesh Ambani, and the country has become a trouble-spot for Vodafone, with losses there severely hurting the rest of the group as shown by the €5bn write-down on the business in November.

Reports in recent weeks suggested Vodafone was looking a possible tie-up with either Idea, Jio or Aircel, which is run by Ambani's brother Anil.

Having been hovering near December's two-year low, shares in Vodafone rose almost 3% to 198.8p by 0845 GMT on Monday, topped the FTSE.

It seems Vodafone is taking the Indian tiger by the scruff of the neck, said analyst Neil Wilson at ETX Capital, noting that November's whopping write-down from “increased competition” in India was down to a 14% drop in data prices, caused by free promotional offers from Reliance Jio as it shakes up the market by offering almost free data.

"Indeed a vicious price war in India means the group could post its first operating loss in ten years in 2017. The Idea tie-up looks like a way to limit the casualties on either side. A merger could help the combined group maintain higher prices and take on the likes of Reliance Jio. Something had to be done and this merger might be the way to strengthen Vodafone’s hand in the Indian price war.”

Last week, in downgrading its rating on Vodafone, Bank of America Merrill Lynch said a mooted Indian merger with Idea "could provide scale" to offset price pressure from Jio, but analysts did not envisage any move in the short term.

But they added M&A activity in India would only offer "some respite" as Vodafone's troubles required larger structural change.