Investors Remain Divided On Vodafone Idea’s Equity Conversion Decision

Vodafone Idea has opted to let the government convert the interest payments on deferred spectrum installments and AGR dues to equity in the company.

Post the dilution, the government would hold around 36 per cent of the company, while the original promoters, Vodafone Group and Aditya Birla Group would own 28.5 and 17.8 per cent of the company, respectively.

“The Net Present Value (NPV) of this interest is expected to be about Rs 16,000 crore 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 Rs 10/- per share, subject to final confirmation by the DoT,” said the update provided to the stock exchanges by Vodafone Idea.

Though the move would help the telecom operator save itself from collapse, while saving thousands of jobs, shareholders appear to be displeased by the move. The stock collapsed by around 20 per cent on the day Vodafone Idea made the disclosure.

As a result of the move, the government would receive a 36 per cent stake in the company at the value of Rs 10 per share, while the market price stood at around Rs 14 a share. The company’s decision has been praised and criticised in equal measure.

Equity Conversion to Benefit Vodafone Idea

Several analysts believe that the stock’s 20 per cent decline was a knee-jerk reaction that was not warranted. Government ownership of the company, combined with better policies, and stabilisation in the telecom market would mean better prospects in the future as per these analysts.

The company would be free of the interest burden as well, with the conversion to equity. Hence, these analysts expect the company to become healthier, offsetting the dilution due to equity conversions. With the government’s large stake in the company, the government could have incentives to stay away from bad policy decisions for the sector.

In addition, the presence of the government could attract more investors and lenders, and help Vodafone Idea shore up its finances. Liquidity should no longer be an issue for the cash-strapped telecom giant. Nevertheless, the conversion to equity is contingent on the government accepting the offer.

Equity Conversion might not Create Shareholder Value

Several analysts and investors believe that the steep decline in share price is justified. They argue that the equity conversion only takes care of the interest payments on spectrum installments and AGR dues. The main liabilities still remain intact on the company’s balance sheet.

CLSA, in a report, said that unless the average revenue per user (ARPU) reaches Rs 250-300 levels, it is unlikely that the company would be able to meet annual spectrum payments beyond the additional four-year moratorium.

Further, the telecom operator would now be faced with the prospect of buying 5G spectrum, which could further burden it with debt. Unless the company is able to deal with its previous payment burdens, the addition of new debt could destabilise the company. The telecom business requires high maintenance-related and growth-related capital expenditure.

Both Vodafone Plc and the Aditya Birla Group have declined to infuse any more funds into Vodafone Idea. Further, they argue, though governments could have made significant gains from the stakes in both BSNL and MTNL, there were no favourable policies announced for the sector, and both companies have lost out to private players. With a large government stake, and two promoters, control of the company might not decisively rest with a single entity, possibly making crucial future decisions more complicated.

While the stock declined 20 per cent on Tuesday, 11 January, it jumped back 8 per cent the next day indicating investor interest in the stock. Possibly, these investors are betting on a more optimistic future and view the cost of dilution as a minor hiccup in the long term story of Vodafone Idea.

Nevertheless, ARPU remains a key metric for the entire sector today. Vodafone has the lowest ARPU among the private players at around Rs 110, whereas Bharti Airtel has the highest ARPU at around Rs 160. There has been a mass exodus of subscribers from Vodafone Idea as well, with Bharti and Jio being the beneficiaries of the shift.

From around 40 crore users, Vodafone Idea has just 26 crore users today. Therefore, bumping up both ARPU and user numbers is crucial for the company. So far, Airtel has led the price hikes in the sector, with Jio and Vodafone following its lead.

While a three player market is likely to continue into the future, whether Vodafone Idea just survives, or creates real value for shareholders remains to be seen.