What's going on?

Vodafone, the UK-based telecom company, said on Monday that it is in talks to merge its Indian subsidiary with domestic rival Idea Cellular, which would make the combined entity one of the biggest wireless companies in the world. (tweet this)

What does this mean?

Vodafone is the second largest cellular operator in India, but it hasn�t been an easy ride: a $2 billion tax spat with the Indian government and the recent emergence of Jio, an aggressive new competitor funded by one of the richest Indians, has diminished the value of its Indian business in recent years. By engaging in merger discussions with Idea, India�s third largest wireless operator, Vodafone is aiming to create the country�s biggest operator � and acquire the sort of scale which could allow it to better fend off competition (e.g. by lowering its costs).

Why should I care?

For the stock: Investors seem pleased with the increased flexibility that this plan would give Vodafone.

Instead of having a private Indian subsidiary, Vodafone would own 50% of a much larger, publicly traded company. That would make it easier for Vodafone to sell out of India, if it wanted to. Alternatively, it could keep its exposure to India and, given the increased scale, it is (arguably) now a better investment opportunity. On Monday, investors signaled they liked the idea by sending Vodafone�s shares up by about 2%.

The bigger picture: India offers a huge strategic opportunity � but the investment costs are high.

It�s hugely expensive to gain a foothold in many Indian industries right now largely because there is a lot of competition (for example, Vodafone�s new competitor, Jio, has spent $20 billion developing its network in recent years and is giving away some services for free). International firms might think twice before paying the costs that are necessary to gain a foothold in India.