The story so far: Struggling telecom operator Vodafone Idea’s board on Tuesday approved the conversion of interest on the Adjusted Gross Revenue (AGR) and on spectrum instalments during the four-year moratorium period into equity issuable to the Government. This is in line with the telecom package approved by the Union Cabinet in September. The company had in October opted to exercise the option to defer the AGR-related dues as well as spectrum auction instalments by a period of four years.
As per Vodafone Idea estimates, the Net Present Value (NPV) of the interest is expected to be about ₹16,000 crore. The equity shares will be issued to the Government at par value of ₹10 per share. Both are subject to confirmation by the Department of Telecommunications (DoT).
- Vodafone Idea’s board approved the conversion of interest on the Adjusted Gross Revenue (AGR) and on spectrum instalments during the four-year moratorium period into equity issuable to the Government. This means that the Government will likely hold 35.8% in the company.
- The move will help Vodafone Idea address near-term liquidity concerns by significantly reducing its payment burden. It will also help the company free up funds for investments in improving network quality as well as for investments in 5G.
- Vodafone Idea is now in a better financial position to raise external funds and possibility of future flexibility in payments to the Government is also possible. On the other hand, this raises some concerns on how much the Government would get involved.
Following the conversion, the Government will likely hold 35.8% in the company. This will result in dilution to all existing shareholders of the telco, including promoters. Vodafone Group holding will go down to 28.5% from 44.4% and for the Birla Group, to 17.8% from 27.7%.
What does the telecom package say about conversion of dues into equity?
One of the major decisions in the telecom relief package was to offer telcos a moratorium of up to four years in annual payment of dues arising out of the Supreme Court’s judgment on AGR as well as on dues payments for spectrum previously purchased.
The Government also gave telcos a one-time opportunity to exercise the option of paying interest for the four years on deferred spectrum instalments and AGR dues by way of conversion into equity of the NPV of such interest amount. Details of the interest amount furnished by the company will have to be certified by the DoT. Equity shares will be issued to the Government on a preferential basis as the relevant date for pricing was 14.08.2021. Edelweiss Securities notes that the pricing at which shares will be issued is lower than the current market price, but come at a 58% premium to the relevant date of pricing.
Industry analysts had termed the flexibility offered by the Government as crucial for the survival of debt-laden Vodafone Idea, which ensures that India remains a three-private player market, while also blunting the urgency to raise tariffs.
How will the move help Vodafone?
Vodafone Idea’s total gross debt stood at ₹1,947.8 billion as of September 30, 2021, comprising deferred spectrum payment obligations of ₹1,086.1 billion, AGR liability of ₹634 billion and debt from banks and financial institutions of ₹227.7 billion, the company had said.
The move will help Vodafone Idea address near-term liquidity concerns by significantly reducing its payment burden. It also eases some concerns over the debt burden even though it remains a major issue.
As per analysts, this will help the company free up funds for investments in improving network quality as well as for investments in 5G. The move is also likely to improve the company's ability to secure long-term funding.
What will the Government's role be?
Following the conversion, the Government will become the largest shareholder in Vodafone Idea. At the same time, it will be the largest creditor of the company. This may have both positive and negative fallouts.
While there is no immediate clarity on the extent of Government’s involvement in the running of the business, Vodafone MD and CEO Ravinder Thakkar had previously said that in all conversations with the Government leading up to the reforms, the Centre had made it clear that it had no interest in owning, acquiring or running any telecom company afresh.
UBS in a note pointed out that Vodafone Idea is now in a better financial position to raise external funds and possibility of future flexibility in payments to the Government is also possible; for, it would be in the Government’s interests to protect the equity value of the company. On the other hand, this raises some concerns in management style and governance, depending on how much the Government would get involved in operations.
Vodafone Idea has also said that it would be amending the Shareholders Agreement (SHA) for reducing the minimum qualifying threshold from 21% to 13%. This means existing promoters will continue to exercise certain governing rights e.g. appointment of directors and relating to appointment of certain key officials, despite their decline in holdings.
Are tariff increases in the offing?
Deutsche Bank Research said that an increase in tariffs is more likely now as “as operators realise that waiting out VI's demise is now a much longer and less likely event”. It also said there was greater regulatory protection possible and the two other private operators – Bharti Airtel and Reliance Jio – will need to be careful to not offend the Government with fierce promotions that undermine Vodafone Idea. Further, it added that the Government as owner of a large portion of the industry will be getting more feedback on the economic impact of its policies, and will probably be more sensitive of policy impact on operators.
This may be just what the company had been seeking. As per the company's latest investor presentation, its subscriber base stood at 253 million for the quarter ended September 2021 with a market share of 23.7% —behind Bharti Airtel and Reliance Jio. Its subscriber base totalled 272 million a year earlier. When Vodafone India and Idea Cellular announced their intent to merge in March 2017, the combined entity was the largest telecom player with close to 400 million customers and 35% customer market share.
What lies ahead?
Though the move brings temporary relief to the company, significant growth in average revenue per use (ARPU) remains a critical to the company’s long-term viability. “ARPU needs to increase to ₹250, from its current ₹109, over the next 3-4 years for it to sustain the leverage,” Edelweiss said.
Likewise, Citi Research added that while the near-term existential concerns had been addressed, the onus is on the company to successfully complete its capital raise, accelerate network investments, and stem subscriber losses. There is also still considerable uncertainty on the ability of the company to meet its enhanced payments to the Government after the moratorium period ends, which would require far more meaningful tariff increases and potentially further Government relief.