Daybreak - Is Vodafone Idea, India’s third largest telco, worth saving?

Episode Date: April 26, 2023

In February this year, Vodafone Idea gave away a 33% stake to the Indian government and the government converted a part of its dues into equity. Many analysts though think even this cannot save the sinking telco.Because the company still owes the government $23 billion and banks $1.5 billion. And it also needs $6 billion for an all-India network upgrade to roll out 5G.Vodafone Idea has too much to deal with—a towering mountain of debt, a ruthless giant of a rival, and the merger with Idea that turned out to be a bad decision.  In today's episode, we look at the possible outcomes of how the saga of the struggling telco could end.Tune in.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Ramon Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

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In 2017, when the merger between Vodafone and Idea was announced, everyone was looking at it with eyes full of hope. It was a very happening time in the Indian telecom scene. Just a year before that, Reliance Geo had entered the market and done what it always does, disrupted it. Until then, Airtel had been the market leader. But this merger made Vodafone idea the largest telecom operator in the country with an estimated subscriber base of 400 million.

But Vodafone's stint up there was quite short-lived. Five years later now, it is almost a sinking ship and it is seeing a swift exodus of its subscribers. Actually, you know what? My colleague and the Kens deputy editor, Sita Raman, has a better announcement. for this. It is a closer description of what the current state of India's third largest telco is. He compared it to an ancient execution method used for criminals in China. It was called Lingchi and it involved extreme torture where the person was tied to a wooden frame

and little by little parts of their body was sliced off. A slow and painful death. That is essentially what is happening to Vodafone idea in India. The Telko's life and times have been tumultuous to say the least. A towering mountain of debt, a ruthless giant of arrival, and the merger, which ultimately ended up being somewhat of a disaster. So earlier this year in February, Vodafone Idea gave away one third of its stake to the Indian government. And the government converted part of its dues, which were basically interest on interests into equity. And now, the government of India is the single largest shareholder in the company.

But many think that even this is not enough to get Vodafone Idea back on its feet. Because it still owes the government $23 billion and the bank's $1.5 billion. And the 5G rollout is adding another layer of pressure on the telco. Vodafone Idea actually complained to the telecom regulatory authority of India just last week saying that Reliance Gio and Bharty Airtel are indulging in predatory pricing with their respective unlimited 5G offers. Nothing is going for Vodafone despite what appeared as a breeder from the government in February.

So the question remains, is Vodafone idea even worth saving? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nickda Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding

and worth your time. Today is Wednesday, the 26th of April. When the government decided to convert Vodafone ideas dues into equity, many thought that the government was trying to save the dying telco. But here is what a senior official close to the Department of Telecommunications said in response to this. And I'm quoting,

we never said we were going to save Vodafone idea. What we did was bring sectoral relief. We offered the dues to equity conversion to everyone. Waterphone opted for it. Gio and Airtel did not. End quote. And when he was asked about the delay in the entire process, he said, and I'm quoting again, look at the pointlessness of the media criticism about the so-called delay in the approval of equity conversion. We converted dues and the share prices of Vodafone idea are still falling. End quote. And the man is right. The current market value of Vodafone idea shares, as I record this, is just a lot of Vodafone idea's

shares, as I record this, is just a little over six rupees. The government, meanwhile, had approved the conversion of Vodafone ideas dues into equity at $10 per share. But it is true. This equity conversion took the government more than a year from the time it came up with the Telecom reforms package. Officials from the Department of Telecom said that it took that long because there were multiple rounds of conversations with the promoters, bankers, alternate investors and vendors. But the problem is that the longer it takes, the closer Vodafone idea gets pushed towards the brink. According to the Telecom regulator, it lost more than 2 million customers in December 2020 itself. And now there is another threat, the rollout of 5G.

As I mentioned earlier, Vodafone has already had to complain to the telecom regulator about unfair pricing by its competitors. And if it continues to lose its subscribers right now, Now, it will become easier for its competitors' geo and Aetel with their 5G capacity to get Vodafone's customers. So now you probably get a better sense of what Sita Raman meant when he compared what is happening to Vodafone idea to Lingchi. The government and Vodafone idea have a very few options left before them. Stay tuned to find out more.

The Aditya Birla Group, Vodafone's promoter, according to reports, is putting in a little over $600 million and is looking for close to $2 billion in bank credits for the telco. But analysts argue that Vodafone Idea needs at least $6 billion to upgrade its network across the country. But even if it manages to get half of that amount, Vodafone Idea can still plug the loss of its subscribers. But again, you may think that the state that it is in, which bank would want to put in more money into Vodafone idea.

So what if its promoter Aditya Beryla is going to put in $600 million? Next to the nearly $23 billion worth of debt, that amount is just a tiny, tiny fraction. And not to forget that many banks have just come out from a bad non-performing asset cycle. But sources in the banking industry and the telecom department told the Ken journalist Pratap Vikram Singh and Sima Singh that the banks are actually willing.

The Aditya Birla group has a good credit line with banks. A senior Vodafone Idea executive told us, and I'm quoting, the group has never defaulted on their payments. They have withheld payments to partners, but not banks. End quote. Two sources in the government and Vodafone Idea said that they expect banks to close the funding within two months from the date of the equity conversion. Plus, supporting Vodafone Idea now is one.

one way for these banks to actually possibly recover the money that they have already lent to the telco. And think about it. Nobody wants an overnight disruption. A huge telecom infrastructure like Vodafone ideas will be virtually impossible to replicate. No new third player will want to enter the sector when the two telco giants of the country, that is Gio and Airtel, have already begun rolling out 5G. Coming up next, another possible option for Vodafone idea. The other possible path in front of Vodafone idea is invoking the insolvency and bankruptcy code. If this happens, the matter will be taken up by the National Company Law Tribunal or NCLT. It is a valid option, but not a very practical one. And here is why. Vodafone's hard

assets are essentially worthless. And soft assets, such as Spectrum, have never really been evaluated in a bankruptcy case. So there is no precedence for. for Vodafone. An experienced telecom analyst told us that now there is an acceptance that one can buy hard assets in an NCLT process. An asset worth, say, hundred rupees can be bought for 50 rupees if loans are not being honoured and the bidding is not very aggressive. But again, there are no set rules for buying a spectrum which is a soft asset when it lands in front of the NCLT. Like other fungible assets, a spectrum's value does not depreciate. And as the analysts rightly pointed out, Airtel and Gio already have enough spectrum in the bank. Why would they buy Vodafone India's

spectrum? The government has another option. Stay tuned to find out. When it comes to deciding what to do with Vodafone idea, for the government, it is like choosing the least worst option. Now, let's get one thing clear. Waving off the Eighty-oferferred idea. Waving off the Eighty-oferredia. The AGR or the adjusted gross revenue is not an option for the government. AGR is basically the usage and licensing fee that the telecom operators are charged by the telecom department. Vodafone has a liability of more than $8 billion. Waving off spectrum dues is also not a possibility because other telcos might ask the government

to do the same for them or they could even take the government to court. But what is being discussed in government's circles? is that if Vodafone performs well, then the government or any future government will be able to defer these payments further. This way, at least the market will stay competitive with three privately run companies. Another outcome according to brokerage firm's CLSA's analyst Deepty Chaturvedi and Sauram Meherotra is this. They say that if Vodafone idea is not able to pay $5 billion in annual payments from the

financial year 2026, when the four-year moratorium ends, the government may be compelled to take ownership stake of about 88%. And if the shrinking of its customers continues, the government can take a final call when the full 5G rollout is complete and the infrastructure can support Vodafone ideas remaining customers. And what does that mean? Here is what the analyst told us, and I'm quoting, At that point, the government or the regulator will be able to look in the eyes of the promoter and say, if you don't want to invest, we will allow you to perish. That won't have any major shake-up in the industry. End quote.

This, however, if it happens, is at least two years away from now. And by then, who knows? Maybe at the government-to-government level, Vodafone idea could be sold to a foreign telecom operator and finally bring an end to this saga. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website.

I am Snigdal-Sharmai, your host, and today's episode was edited by my colleague, Radov, Cien.