Vodafone Idea throws in a googly. Allows conversion of moratorium interest into government equity. Why?

Contrary to general consensus, Vodfaone Idea (VIL) informed that the board has approved conversion of interest on delayed payment of spectrum and Adjusted Gross Revenues (AGR) dues to the Government into equity.

Key points to note

  • The option was available to the Company in line with the telecom relief package announced by the Government in September 2021.
  • As per VIL’s calculation, conversion would make Government the largest shareholder of the Company with about 35.8% stake followed by Vodafone Group at 28.5% and Aditya Birla Group at 17.8%. These numbers are obviously based on certain assumptions and would finally depend upon the approval of those assumptions by the Department of Telecommunications (DoT). Conversion price in line with the agreed formulae comes to Rs 10/ share.
  • Though VIL has approved the conversion, Government may decide to instead convert any part of this interest into preference shares instead of equity shares and such preference shares may be optionally or compulsorily convertible and/or redeemable and/or participating in nature.

Why consensus was otherwise?

Because of the significant dilution involved and the general belief that telecom sector is looking at revival. VIL also has been regularly talking about the new fund raise indicating efforts towards the revival.

Airtel recently announced that it will not convert the moratorium interest into equity and would instead pay it. Everyone thought that VIL would do the same.

So why VIL has decided to allow conversion and hence significant dilution?

I have been regularly mentioning that VIL’s liabilities and hence troubles are much bigger than the doses of insignificant capital that has been coming into the Company from promoters and lenders.

It needs something more strategic and I believe VIL’s current decision is an effort towards that.

How?

  • The situation becomes especially interesting if Government decides to take equity.
    • Given significant liabilities on books, very likely that government may look to sell it’s stake to some other strategic investor. Government’s ownership might allow easy settlements with the lenders as well as the government debt (e.g., Air India).
    • However, if it doesn’t, then government being the owner still becomes responsible towards all the liabilities reducing pressures on the existing promoters.
  • If government decides to convert into preference shares
    • Liability on the Company becomes much more less burdening compared with the pure debt otherwise.
    • Nothing else change’s much on ground for the existing promoters.

In the hindsight, I actually believe that VIL may have played the best card.

How it unfolds, only the time will tell.

Given the current Board decision, one thing is clear – Vodafone as well as Aditya Birla Group are not much interested in supporting and carrying the business on their own !

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