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 !
Analysts are saying that if govt decides to convert into equity, it’s credit accretive for the Company.
Theoretically yes.
However, the points to keep in mind –
Improvement of credit worthiness comes if govt agrees to have a joint control and ownership. I don’t see that happening.
And as I have been repeatedly mentioning – VIL needs equity and not debt. It is already enjoying too much debt !
Key updates:
Govt has still not converted into equity (and rightly so as can be also inferred from the discussions in this post so far).
Govt wants to check VIL funding progress before owning the stake.
The DoT is taking a cautious approach as it feels that Vi will find it difficult to compete against financially stronger rivals Reliance Jio and Bharti Airtel by just depending on government support, and without substantial external funding.
No govt stake deal in Vodafone Idea until promoters infuse enough cash: Govt Officials
As per officials,
It seems a deadlock situation currently. All this is moving exactly in the direction, as this post has been highlighting since the beginning.
https://economictimes.indiatimes.com/industry/telecom/telecom-policy/no-govt-stake-deal-in-vodafone-idea-until-promoters-infuse-enough-cash/articleshow/96723342.cms?from=mdr
Finally, Govt has agreed to convert accrued interest of Rs 16,133 crore on deferred adjusted gross revenue (AGR) dues into equity at Rs 10 a share.
To me, nothing much needs to be read into this conversion. As govt’s presence is merely symbolic, unlikely that it would give much comfort to external investors.
It was done as a last resort as otherwise there was a deadlock. Besides, now being the largest shareholder, govt has an option to try sell its stake to anyone else, whenever feasible.
For now it’s back to the promoters to arrange funds for revival; which at this stage looks difficult without significant restructuring (due to over 2 lakh crore liabilities).
Will be interesting to see how this unfolds.