Earlier in June, K M Birla, the chairman of Vodafone-India created a buzz all around the media with a little piece of the letter he wrote to the government. It is because that little piece of the letter had a rather big offer in it. Well, I know you have heard it by now, but it’s no secret that we are astounded and we won’t mind repeating.
The chairman of Vodafone-Idea offered to hand over his stake in the telecom giant to the central government. This offering was his attempt to save the drowning company because honestly, there aren’t many other options available for the management to do. The stake was thus, conditional. K M Birla offered the overall 27 per cent stake he holds in Vodafone-Idea to any public sector, government or financial entity, if the government thinks they can save the telecommunications company.
What was in the letter?
This letter was addressed to the Cabinet Secretary and had something very intriguing in it. It read that the company has been trying to raise INR 25,000 crore from various investors. However, to achieve so, the said investors need reassurance from the government that they are willing to have a three-player telecom market. But, isn’t it the government’s public stance already?
Well, the request has been made for a clear intent through active, and well, positive, actions on long-standing requests. These requests include clarity on adjusted gross revenue liability, the adequate moratorium on spectrum payments, and most importantly, a floor pricing regime above the cost of service, as mentioned in the letter written by KM Birla.
These requests come into effect after the distorted financials of the company, and it continues to get at an even worse position, so much so that it could be driven to an “irretrievable point of collapse” if the government doesn’t display their active participation in the maintenance of a three-player market. Well, all this was about what the letter contained. But, the main question is still unanswered, the why. And if that eventually does happen, what would happen to the company in the long run?
What is the position of the Vodafone-Idea that compelled K M Birla to offer his stake to the government?
We just mentioned that the Vodafone-Idea’s financials are in a very vulnerable position and could drive to the ground if help is not sought. Well, this comes from the fact that Vi has been under debt of INR 1.5 lakh crore as of the last data release.
The request made by K M Birla to seek clarity on the adjusted gross revenue liability is the INR 60,000 crore that the company owes to the Department of Telecommunication, as reported by the balance sheet of the company as of March 31 of this year. Along with that, the company’s obligations to banks and financial institutions include INR 96,270 crore in deferred spectrum obligations and INR 23,000 core in other liabilities.
But wait, what clarity on the adjusted gross revenue issue? Didn’t the Supreme Court rule in favour of the standing definition of the Department of Telecommunications’ adjusted gross revenue back in 2019?
Well, yes, as a matter of fact, they did. And that’s when the Company declared that if the company doesn’t get help from the government on the adjusted gross revenue liability, it could go out of business. This request is just reiterated with this letter. So, more than clarity, the company is seeking redemption.
So, in all, it can be said without a doubt that this recent letter from K M Birla is his last attempt to save the drowning ship, and well, it looks like the life tube is not getting any closer. The company is up close to financial ruin and the entire country is witnessing it one day at a time.
But, looks like the letter had a hidden message too. K M Birla, in his letter, hinted that the foreign investors in question are looking for validity and active government support for a three-player market. More specifically, he implicitly hinted at the lack of interest of foreign investors to put their money in India’s Telecomm sector until the government sends across clearer instructions.
And I’m not sure if it was one of the agendas of the chairman, but after the offer of K M Birla to hand its stake in the company, the share of the company plunged over 10 per cent. Does it mean the market is optimistic about the government handling the reigns? I guess we’ll have to wait around and see.
Is it possible for the Department of Telecommunication to take over Vodafone-Idea Vi?
Well, experts believe the answer is a yes. It is because the company falls under a strategic sector, allowing the government to intervene critically if it is needed for the public interest. And to be fair, experts think this might be the only way for Vi to save face.
As per a recent report published by the Deutsche bank, the probability of Vodafone-Idea Vi to survive is highly contingent on the government’s willingness to convert its debt into equity, and merge the operations with a state-run financially stable corporate, such as Bharat Sanchar Nigam Limited (BSNL). However, this also comes with a clear directive of the need for the government to represent its active participation in the maintenance of a three-player sector.
But if that happens, what would happen to the shareholders?
Well, before I comment on this question, allow me to iterate the fact that the government’s debt is about six times the current market capitalisation of Vi. This means that if it happens, shareholders would be effectively diluted, undoubtedly. So, the correct assessment here would be to see if this is the right step to take. And well, based on the predictions made for the company’s future, if the giant gets saved this way, experts suggest that it would be an acceptable outcome.
“Should this happen, Vodafone-Idea Vi shareholders would be heavily diluted, as government debt is roughly six times the current market cap. But such a solution might be an acceptable outcome to shareholders, with a $20 billion enterprise value feasible and non-dilutive,” the Deutsche Bank Research report of July 26, said.
However, do you think the government is in such a position so as to afford to take over a company and letting go of this much debt? Especially after the COVID-19 crisis, which reigned like a rumble of thunder on the government’s fiscal resources. So, at a time when the government is letting go of its stake in numerous public sector companies and offloading its fiscal strain, experts suggest it is almost nugatory to even consider the probability of government taking over.
Where is Vodafone-Idea Vi headed in the long run?
To be honest, if push comes to shove, it is difficult for Vodafone-Idea Vi to even have a long run. It is because the company’s financials, as explained above, are drained in debt and the ways out for the company seem to be closing in. For the company to stay afloat, it is, if mentioned tacitly, necessary to raise funds in the coming months. That itself would only help it to sustain operations, cutting back on the debt goes way longer.
And since the government’s prospects of taking over are almost negligible, it is important for the company to raise tariffs in the short term so as to cover its cost of operation. Government aid would still be needed to get some relief on the adjusted gross revenue liability and other obligations like spectrum payment liabilities. As explained earlier, raising funds is also a difficult task, given the needs of investors is also contingent on government willingness.