Indian unit's $24 billion merger with local rival is risky bet in a cutthroat wireless market

By Stu Woo in London and Karan Deep Singh in New Delhi

Vodafone Group PLC said Monday that it would merge its embattled Indian business with a local rival, a $24 billion move that would create India's largest wireless company and could strengthen the British telecommunication company's standing in a cutthroat market.

Vodafone and Idea Cellular Ltd., which are respectively India's No. 2 and No. 3 mobile operators, would overtake Bharti Airtel Ltd. asthe country's leading carrier. The two sides said in January that they were exploring a merger.

For Vodafone, the combination represents a risky doubling down on India, a large and promising market that has nonetheless proved to be much more expensive than the British carrier initially expected. Flush with cash from the 2014 sale of its Verizon Wireless stake, Vodafone has spent heavily around the world, including in India. But in November, it took a EUR5 billion ($5.4 billion) write-down there, stung by intense competition.

That competition cranked up even further late last year, when Mukesh Ambani, the country's richest man, started offering almost six months of free mobile services to promote his new carrier. Some cellular plans in India already were going for less than $3 a month. Vittorio Colao, chief executive of Vodafone, the world's second-biggest mobile operator by subscribers, has called Mr. Ambani's promotion "unprecedented" and difficult to plan against.

Mr. Colao said in a news conference Monday that the two companies would continue to operate under their current brands indefinitely but would eventually work under the same name. Mr. Colao said he didn't expect major regulatory hurdles to the deal.

The implied value of the new company would be about $24 billion, since Vodafone India is worth 828 billion rupees ($12.64 billion) and Idea is worth 722 billion rupees ($11.02 billion).

The planned combination would create India's largest wireless-network operator with almost 400 million customers and bolster Vodafone's position in one of the world's largest and most-promising telecom markets.

Mr. Colao said in November that 700 million people in India don't have cellphones, while 600 million people do. He said of those 600 million, only 250 million have smartphones. That means carriers are jostling to get into position to sell lucrative data plans to potentially hundreds of millions of future smartphone owners.

Vodafone will initially own 45% of Idea after the merger. The companies expect to save about $2 billion annually by the fourth year after the merger. Vodafone's 42% stake in Indus Towers isn't part of the deal.

Mr. Colao said last month that the merged company's subscriber base would be added to Vodafone's subscriber base, so Vodafone's standing as the world's No. 2 carrier wouldn't be affected.

Vodafone and Idea are a good match, said Shiv Putcha, a Mumbai-based analyst with research firm IDC, because they own the rights to cellular airwaves in different parts of the country and don't overlap much in the regions and customers they serve.

Vodafone gets the added bonus of using the merger as a sort of backdoor listing. It has been planning an initial public offering in India for years but hadn't been able to get the timing right. Vodafone's parent company will also benefit because it will own a minority stake in its Indian operations, so the $8.2 billion in debt it holds will be taken off its books.

The merger fits with Vodafone's strategy of being the clear No. 1 or No. 2 player in each of the 26 countries it competes in.

Idea shares, which surged earlier this year when news of the merger talks came out, fell 9.9% Monday to 97.05 rupees ($1.48). Vodafone shares were down 0.3% in trading Monday.

--Kenan Machado in Hong Kong and Debiprasad Nayak in Mumbai contributed to this article.

Write to Stu Woo at Stu.Woo@wsj.com

(END) Dow Jones Newswires

March 21, 2017 02:47 ET (06:47 GMT)

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