Vodafone Idea Rescued By the Government — Here’s What it Means
Yesterday, the Government of India went shopping in the telecom sector.
Beginning with the acquisition of a 35.8% equity stake in Vodafone Idea (Vi), it went on to pick another 9.5% stake in Tata Teleservices, a Tata Group company.
Strictly speaking, these acquisitions weren’t “shopping” but rather “payments” for the statutory dues owed by these companies — a “debt to equity” swap of sorts. Vi essentially approved the conversion of interest related to its spectrum auction instalments and AGR (adjusted gross revenue) dues with a net asset value of close to ₹16,000cr ($2.1bn) into equity.
This effectively makes the GoI the single-largest shareholder in Vi.
On the bright side, this would lessen the debt-burden of the company which has been staring bankruptcy in the face for the better part of a decade.
Meanwhile, it also raises questions about the future of the company as far as ownership and governance are concerned. Because if you think the Government effectively “owns” Vi now, maybe think again, because it’s more complicated than it looks.
Allow us to simplify it for you.
Saviour #1: The Government Bailout
For a company with a debt mountain the size of ₹1.95Lcr ($26.4bn), a Government buyout is a lifesaver. GoI’s support ensures protection of its equity value and long-term survival as opposed to the “irretrievable point of collapse” it faced a few months ago, as described by K.M. Birla, Vi’s ex-Chairman himself.
The rescue will also prevent India’s telecom sector from turning into an effective duopoly (or more likely a Jiopoly), prevent a surge in bad loans from Vi’s creditors, improve the company’s credit prospects and dispel critical liquidity concerns for the time being.
But there are significant disadvantages that come with a Government holding. Turning into a wholly- or semi-state unit means possible Government intervention in the future which could dissuade potential investors.
This concern is also amplified given the lack of clarity on the company’s day-to-day management. GoI claims that it will not run Vi and that its existing promoters will manage operations. But that is an assurance better taken with a pinch of salt because it is unlikely that GoI will waive off a debt this size without some manner of controlling rights in the company in exchange.
Another question that begs clarity is the fate of state telecom carriers like BSNL and MTNL. Is Vi going to be merged with them or treated like the shiny new step-sister that enjoys unqualified autonomy? Perhaps, the latter seems most likely.
A logical solution could be to merge all Government-owned telcos if one doesn’t wish for them to compete against each other. Plus, if Vi and BSNL enter into an asset-sharing agreement on 2G, 4G and 5G, it could end up being a win-win for both allowing them to proliferate commensurately. With the 5G era on our throes, Vi’s wireless coverage and BSNL’s pan-India wired coverage could chalk out very well and aid them both in taking on rivals like Reliance Jio and Bharti Airtel.
But bringing a private Indian company (with the legacy of a global corporation) together with a public sector undertaking can be quite tricky from a financial, legal and synergical standpoint. Although mergers between telecom giants aren’t uncommon around the world (e.g. Broadcom-Brocade, Qualcomm-NXP, AT&T-Discovery), a convergence like that between government and private entities could be very complicated.
Besides, excluding the estimated equity value of shares given to the GoI and Vi’s already-paid dues (around $1.05bn), the company still owes billions of dollars in dues and debt. So, yes, Government acquisition may have been a stopgap measure to allay immediate dissolution, but it’s certainly a long way from overall crisis resolution.
Saviour #2: The Telecom Relief Package
India’s telecom sector has become a Martian territory as far as the survivability of telcos is concerned. Higher statutory fees and highly-competitive pricing strategies by a few players are some of the factors which have created zombies out of operators that are always reliant on taxpayer support.
Considering that, the relief package announced in September threw a much-needed lifeline for them. Reforms like the four-year moratorium on dues and a 100% FDI through the automatic route were just what the doctor ordered for their survival.
Survival it may have ensured, but the package wasn’t enough to aid the revival of cash-strapped telcos, particularly not for Vi. Therefore, the Government’s option to convert debt into equity in the company was imminently on the cards.
The Road to Vi’s Revival
The first step to revival is to reduce debt. And this is where it becomes important to state that the GoI’s stakeholding in the company will not change its debt situation conclusively.
Vi has a debt of ₹1.9Lcr ($26.4bn), the chunk of which (₹1.68Lcr ($22.7bn)) is owed as AGR and spectrum fees, still leaving a sizable ₹23,400cr ($3.1bn) of institutional debt. Hence, a lot more capital is required for it to stay afloat, competitive and fund the 4G-to-5G transition
Having said that, the Government’s entry is expected to make fundraising easier for the company. There is still time before the equity conversion takes full shape and effect and during this time, Government policies and intervention could spruce up the attractiveness of Vi.
One of these policies could be through an increase in the ARPU (Average Revenue per User). Planned tariff hikes, acceleration in network investments and stemming subscriber losses remain key to fulfil its cash flow needs further.
However, this is easier said than done. The one-day decline in stock value by close to 20% was the first sign that a Government shareholding may not have been the answer to all of Vi’s prayers. The company has failed to turn profits since 2016 and has bled almost 10% of its subscriber base in the past year alone. With tall and impending capex plans in the offing, the bigger question for Vi now is, where to find the money?
(Originally published January 12th 2022 in transfin.in)
