Vodafone Idea Converts AGR, Spectrum Dues to Equity

Government to own 35.8% of Vodafone Idea

While it is not something that was totally unexpected, the investors have not received it well; shares of Vodafone Idea plummeted to ₹12 apiece as the news broke. Currently, the telco's shares are trading at over 11% lower price of ₹13.15 apiece. This move will lead to the dilution of all the stakeholders in the company, including the two promoters.

In a statement, the telco has said that it will issue equity shares to the government at Rs. 10 per share. The final price r remains subject to DoT confirmation, however. "The Net Present Value (NPV) of this interest is expected to be about ₹16,000 crores 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 ₹10 per share, subject to final confirmation by the DoT," the statement read.

With this, the government will own about a 35.8% stake in Vi, reducing the promoters' stake significantly. Following the completion of the transaction, Vodafone Group will hold 28.5%, while ABG will hold about 17.8%. The statement also read that the accrued interest will get converted to equity under Section 62 (4) of the Companies Act. Along with this, the DoT had said that it will treat the amount as a loan till the time the conversion goes through.

A Move Many Saw Coming

Days after the government announced the relief package, ICICI Securities had predicted that Vi will become a government-owned entity. In a note, it had said, “with equity option, in the worst case, VIL can become a government entity. The government has provided the option to convert interest on deferred payment into equity which works to ₹94 billion; and at the end of four years, the government also has the option to convert the deferred installment into equity which works to ₹1,008 billion for VIL. Total equity conversion will be Rs. 1,102 billion in the next four years on a market cap of ₹260 billion”.

It added that at the end of the moratorium, the equity conversion will cause an increased debt liability. Not only that, but it will also lead to dilution of the stake of existing shareholders. At the end of the day, the government may end up becoming the largest shareholder of the telco.

And Tuesday's move has just done that, about 4 months on.

The telco had to raise about $1 billion to compete, and for over a year, it has struggled to raise funds. The relief package did improve its chances of survival, and Vodafone Idea had gone for deferred spectrum and AGR dues in October. However, that was clearly not enough. The moratorium would help it save almost Rs. 1 trillion in cash flow savings. Though, after the moratorium ends, the telco’s annual payments will almost double to ₹43,000 crores, from ₹24,800 crores. Also, the telco’s statutory dues will grow from ₹1.6 trillion right now, to ₹2.2 trillion.

A tariff hike last month looked set to improve the telco's fortunes. However, after trying all it could, the telco has finally gone with the last resort.

The Last Resort

The telco has struggled to compete as its Capex spending lagged behind that of Jio and Airtel. What's more, it has suffered customer churn almost constantly throughout the past few quarters. The telco had also written to the DoT in November; it had notified the department that it won't have enough funds to pay license fees for the 2nd, 3rd, and 4th quarter of FY22. Vi will have to pay ₹6,000 crores in the Q1FY23 when it has said it will pay the dues.

The telco had been struggling financially since its inception in 2018. The telco has not registered a profitable quarter to date. What’s more, it has accumulated a debt of almost ₹2 trillion, most of it due to the government in statutory dues. Therefore, the moratorium gives Vi some much-needed short-term respite; the telco can save as much as ₹1 trillion over the next 4 years.

However, Vi still needed cash immediately. It has liabilities of ₹12,000 crores coming up over FY23, most of it in the form of NCD. Including the SUC and LF dues, this amount triples to ₹36,000 crores over the entire fiscal. Apart from these liabilities, the telco still needed more cash to invest in its 4G network and compete with Airtel and Jio.

With 5G auctions coming up within the next 3-4 months, without this move, the telco would have been unable to compete at all.