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Morningstar | Vodafone Closes Idea Cellular Merger in India Creating Largest Wireless Operator; Shares Undervalued

Vodafone announced on Aug. 31 that it closed its merger with Idea Cellular in India. The deal creates the largest wireless operator in India with 408 million subscribers or 32.2% market share. The combined network covers 92% of the country’s population. We are excited for the closing of the merger. Besides the increased scale and coverage of the combined company it provides lots of opportunities for cost savings as duplication in some regions and staff in some areas are reduced and nationwide marketing becomes more efficient as almost all regions are now reachable by the combined network. However, we expect the cost savings to primarily be spent on marketing and operating on lower prices as Vodafone Idea (the company’s new name) cuts pricing to better compete against Reliance Jio, which continues to act irrationally, in our opinion. Thus, we don’t plan to change our fair value estimate for Vodafone despite the cost savings potential. Our narrow moat rating also remains unchanged.

Vodafone will initially own 45.2% of Vodafone Idea with the Aditya Birla Group owning 26%, but with the expectation to buy additional shares from Vodafone over time until the two’s shareholdings are equal. While the current stock price values Vodafone’s shares at EUR 5.3 billion we are concerned the shares will continue to decline until RJio shows more rationality in the market. The stock has dropped 57% from its recent high at the beginning of January. Hence, we are not crediting Vodafone for the full current value of its stake. One important item is the merger provides a listing for Vodafone’s Indian operation, which has been a goal for several years. It also provides an exit strategy if Vodafone decides to leave the country at some point.