Vodafone

Faced with a new, aggressive competitor, British telecom giant Vodafone is merging its Indian business with Idea Cellular to create India’s largest wireless company.

The new player in the market, Reliance Jio, is owned by Mukesh Ambani, India’s country’s richest man. Its strategy has included offering almost six months of free mobile services, prompting what analysts have called a “vicious price war.”

The deal announced Monday between Vodafone and Idea is the sector’s second merger in as many months as Reliance Jio’s competitors seek economies of scale. Last month, industry leader Bharti Airtel announced plans to buy the Indian business of Norway-based Telenor.

The combination of Vodafone and Idea would overtake Bharti Airtel, with almost 400 million users and a 35% share of the market by customer numbers. Vodafone India said the merger would generate cost savings of about $2 billion annually by the fourth year after the deal.

“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,” Vittorio Colao, Vodafone chief executive, said in a news release.

Chris Lane, an analyst at Bernstein, said the cost savings could compromise service quality. “There will certainly be disruption as they seek synergies, because they can only do so by firing people or removing network,” he told The Financial Times, estimating that the merged company would lose 3-5 percentage points of market share over the next two or three years.

“I think both Jio and Bharti are licking their lips — this is a prime opportunity for them to take market share,” he added.

Vodafone, the world’s second-biggest mobile operator by subscribers, entered the Indian market in 2007 by acquiring a majority stake in Hutchison Essar for $7.4 billion. It will own 45.1% of the new Indian business while the Aditya Birla Group, Idea’s parent company, will own 26%.

In India’s relatively untapped market, “carriers are jostling to get into position to sell lucrative data plans to potentially hundreds of millions of future smartphone owners,” MarketWatch said.

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