The merger of MTNL [Get Quote] and BSNL appears a good idea since it will result in a robust entity, which will have a nation-wide footprint and a stronger balance-sheet.

With competition in the telecom industry intensifying, economies of scale are a must to survive. And without a strong balance-sheet, any company would find it difficult to fund increasing amounts of capital expenditure, necessary to upgrade technology.

Seen in this light, the merger of Mahanagar Telephone Nigam and Bharat Sanchar Nigam appears to be a sound idea since it would result in a more robust entity.

Post merger, the new company will command over 90 per cent of the fixed-line market and around 18 per cent of the wireless market with a total subscriber base of over 45 million, almost half the total subscriber base.

The rationale for restructuring is a strong one and the merger will result in:

A nation-wide footprint: The new entity will have a pan-India presence, a larger scale of operations, making it more viable. With differential pricing allowed, it will be best -positioned to offer customised packages across the fixed and mobile spaces. Despite not being present in New Delhi and Mumbai, BSNL has managed an 18 per cent share in the cellular space, albeit by offering lower tariffs.

Complete product range: Without the Mumbai and Delhi circles, BSNL is like a torso without a head and cannot offer competitive services to corporates or individuals. Post merger all services -- NLD (national long distance), fixed wireless telephony, cellular and broadband can be offered.

One concern that cannot be ignored, however, is the high technological obsolescence in the industry and that the fact that new technologies could do away with the need for last mile connectivity, which is BSNL's strength.

Stronger balance-sheet: With total revenues of Rs 35,000 crore (Rs 350 billion) and profits of Rs 6,000 crore (Rs 60 billion) and a net worth of around Rs 66,000 crore (Rs 660 billion), the new firm will have a strong financial base.

The net worth will allow the company to borrow funds. The total cash on the books is around Rs 6,000 crore, which can be utilised to grow its wireless business and to finance the foray into broadband.

Savings: One company rather than two will mean lower expenses on overheads, marketing and the workforce. Larger procurements of equipment will allow the firm to bargain with vendors.

How the merger helps MTNL

MTNL's core fixed-line business remains under pressure. Its subscriber base fell from 4.63 million lines in FY03 to 4.46 million lines in FY04 and further to 4 million in H105 with private sector operators trying to lure its corporate customers. Moreover, it is not in a position to increase fixed-line rentals immediately, while there could be a fall in long-distance rates.

In the wireless space, despite being present in the two most lucrative circles of Mumbai and Delhi, it has managed a market-share of less than 2 per cent and players like Hutch, BPL and Bharti have cornered much larger shares.

However, its additional capacity for 8,00,000 GSM (global system for mobile communication) subscribers and the relaunch of its services in November appear to have paid off -- it added nearly 71,000 subscribers in November.

MTNL's voluntary retirement scheme has been delayed and its staff costs are rising - they rose 13 per cent to Rs 1,619 crore (Rs 16.19 billion) in FY04 from Rs 1,433 crore (Rs 14.33 billion). It has nearly 56,000 employees on its rolls.

Unless the VRS is implemented soon, the costs could impact its profits adversely. BSNL's workforce at 36,000 is six times that of MTNL. However, BSNL's employee costs, at Rs 1,75,000 per annum, were about 30 per cent lower than that of MTNL in FY03.

The merger can take place in several ways but the simplest method would be to merge BSNL (100 per cent government-owned) into MTNL (government has a 56 per cent stake) since MTNL is a listed company.

Post-merger BSNL would contribute around 80 per cent of sales and earnings before interest, depreciation and tax. Assuming that the government will not be unfair to the individual shareholders, the merger should benefit shakeholders of MTNL.

According to Amitabh Charaborty, head of research, Kotak Securities, operational synergies are evident. Chakraborty, however, observes that the balance-sheet could be under pressure initially as there could be some write-offs in BSNL, though over a longer period, the merger would help MTNL.

Moreover, he says if there is a reverse merger of BSNL into MTNL, the minority shareholders' stake could be reduced to 8-9 per cent, given the difference in the sizes of the two firms. Also the lower access deficit charges will hurt MTNL's revenues in FY06.