Four months after the centre stepped in to offer some relief to the telecom industry, Vodafone Idea has decided to opt for converting the interest on spectrum and adjusted gross revenue (AGR) into equity, a move that will see the government become the largest shareholder in the country’s third largest telecom company.
Vodafone Idea, hit by huge AGR dues, high debt and falling customer base, has been looking to raise funds for some time now, but with little success. In September 2021, the government stepped in and announced several measures to help the telecom industry, including a four-year moratorium on dues and rationalisation of the definition of adjusted gross revenue (AGR). It also gave an option for the companies to convert the interest component into government equity.
In October 2021, Vodafone Idea’s board approved the deferment of spectrum auction installments as well as AGR-related dues. The board, which met on Monday, has now approved the conversion of the full amount of such interest related to spectrum auction installments and AGR dues into equity.
“The net present value (NPV) of this interest is expected to be about Rs 16,000 crore as per the company’s best estimates, subject to confirmation by the DoT. Since the average price of the company’s shares at the relevant date of 14.08.2021 was below par value, the equity shares will be issued to the Government at par value of Rs 10 per share, subject to final confirmation by the DoT,” Vodafone Idea said.
The stock had closed at Rs 14.85 on Monday. So, the government is set to get the stake at a discount. Not surprisingly, the shares slumped 20 percent on Tuesday to Rs 11.90.
Following the conversion, it is expected that the government will hold around 35.8 percent of the total outstanding shares of Vodafone Idea. The promoter shareholding will get diluted, with Vodafone Group holding 28.50 percent and Aditya Birla Group holding around 17.8 percent. At the end of September 2021, promoters had held 72.05 percent stake in the company. While the Aditya Birla Group had held 18.48 percent, the foreign shareholding stood at 53.57 percent.
There is no doubt that Vodafone Idea needs funds to survive, make further investments in its infrastructure and also get ready for the upcoming 5G auctions. In the September quarter, the company reported a consolidated net loss of Rs 7,132 crore on revenue of Rs 9,406 crore. Its gross debt as of September 30, 2021 stood at over Rs 1.94 lakh crore.
The move to convert the interest dues into equity will mean lower cash outflows, which could instead be used to augment its network and infrastructure.
The government getting a stake in the company could increase the chance of Vodafone Idea’s long-term survival. However, this will come at the cost of dilution of stake of existing promoters. With the promoters no longer the largest stakeholders, they may not be able to take future decisions on their own. Once the government becomes the largest stakeholder, the restructuring of the board and the Vodafone Idea management will also have to be watched out for.
Vodafone Idea said that the governance and other rights of the promoter shareholders are governed by a Shareholders Agreement (SHA) to which the company is a party and are also incorporated in the Articles of Association of the company.
“The rights are subject to a minimum qualifying threshold of 21 percent for each promoter group, and in light of the conversion of interest into equity, the promoters have mutually agreed to amend the existing SHA for reducing the minimum qualifying threshold from 21 percent to 13 percent for the purpose of exercising certain governing rights e.g. appointment of directors and relating to appointment of certain key officials etc.,” it said.
Tony Verghese, partner at J. Sagar Associates said that while Vodafone Idea’s move to convert its dues into government equity will definitely keep the company afloat for some time, with the current shareholders - Vodafone and Aditya Birla Group - now becoming lesser stakeholders in the company, it needs to be seen how things will improve from the perspective of overall sustainability of business and expansion.
“It is unlikely that the business will sustain for a long period, unless the government comes out with a definitive plan of reviving the business of Vodafone Idea in consultation with the existing shareholders,” added Verghese.
One view in the past has been that Vodafone Idea and BSNL be merged. A Deutsche Bank report had said last year that this was the best option. But, the state-owned BSNL and MTNL already have their own set of challenges.
The government had in the past planned to merge the two companies, but it didn’t make much headway. The government had offered a Rs 70,000 crore relief package to the two loss making telecom companies back in 2019, but that may not be enough, given the telcos would need support towards the rollout of 4G network as also plan for 5G in future. The government is looking to sell non-core assets at BSNL to generate funds.
In the longer term, a substantial hike in average revenue per user (ARPU) will be the best way forward for the sustainability of Vodafone Idea and the wider telecom industry, say analysts.
In November 2021, Bharti Airtel, Vodafone Idea and Reliance Jio raised tariffs on prepaid plans by around 20 percent. The full impact of this tariff hike will be visible on the earnings of telecom companies in the Jan-March quarter. But, more price hikes may be needed later this year.