The merger plan between Idea and Vodafone India has finally received approval from the Indian authority. A noncash financial loss of up to RM3.0b is expected to be recognised post the dilution of Axiata's shareholding in the enlarged entity. All in, we are keeping our Axiata's FY18E/FY19E core earnings unchanged. BUY with a target price at RM5.00. 

India's authority (Department of Telecommunications (DoT)) has given its final nod to the merger of Vodafone India and Idea Cellular, which will create the country's largest mobile operator. The deal is expected to be completed within August 2018. 

The new telecom behemoth, Vodafone Idea Ltd. will service a customer base of 440m, representing 39% of the total market share. It will dislodge Bharti Airtel Ltd -the current market leader with 344m customers. The merged entity's revenue is forecasted to be in excess of USD1Ob with an estimated revenue market share of c.37%. The deal comes at a time of raging price war, triggered by new entrant Reliance Jio, which has shaken up the local telecom market with free voice calls, low-priced data plans as well as significant handset subsidies. Reliance Jio has spent an estimated USD35b-USD4Ob on new technologies and 4G network rollouts, far exceeding the combined industry's total investment over the last 20 years. 

Despite the merger providing a robust value creation platform for the consolidated business, it effectively changes the status of Axiata's stake in Idea from being a strategic investment to a simple investment as its shareholding in the combined entity is diluted from 16.33% to 8.17%. A technical non-cash accounting adjustment of c.RM1.5b to RM3.0b (based on the share price at the point of the reclassification date) is expected to be captured in the group's 2Q18 unaudited accounts and the exercise does not have any impact on Axiata's underlying performance and cash position. 

Source: Rakuten Research - 30 Jul 2018