Government stake in Voda-Idea to avoid immediate risk of company bankruptcy, experts say

The government is expected to become the major shareholder of Vodafone Idea Ltd (VIL) with a 35.8% stake after the telecommunications company chooses to convert the amount of interest on AGR contributions into government equity. The company is under the weight of a debt of around Rs 1.95 lakh crore.

The Vodafone group will see its stake increase from 44% to 28.5%, while the Aditya Birla group will see its stake increase from 27.7% to 17.8%, according to India time.

Vodafone Idea has decided to opt for the conversion of approximately Rs 16,000 crore of interest payable to the government into equity, which will represent approximately 35.8% of the company’s capital.

After Vodafone Idea, Tata Teleservices (Maharashtra) announced on Tuesday that it will opt for converting the amount of interest on AGR contributions into equity and after the conversion, the government stake in the company is expected to be around 9.5 %.

Ms. Vipula Sharma, Director – Ratings and Manager – Infrastructure ratings [Brickwork Ratings ], said: “Who will be in charge, who owns this business is key. While this ensures survival, a clear promoter is essential in this industry which is still recovering and yet to achieve viable ARPUs.”

Tony Verghese, Partner, J Sagar Associates (JSA), said: “The movement of Vodafone Idea to convert its debt relating to interest owed on the spectrum into shares in favor of the government is indeed very surprising and unexpected. will certainly keep the business afloat for some time, however, in terms of overall business sustainability and expansion, with current shareholders, developer Vodafone plc. to see how it will improve.

“The business is unlikely to last for long unless the government presents a definitive plan to relaunch Vodafone Idea in consultation with existing shareholders. Can the government consider consolidating Vodafone’s business? Idea with BSNL, such as a merger and subsequently finding a buyer, is something that remains to be seen, as the BSNL auctions have encountered several obstacles in recent years, ”added Verghese.

The government could end up owning 34% of Vodafone Idea if the company exercises the option, IIFL Securities said. “The DoT has set the relevant date for the pricing of the shares as August 14, 2021. The VWAP calculation gives a number below the par value of Rs 10; therefore, the issue price would be Rs 10 if Vodafone Idea were to exercise the option.With the outlook for Vodfaone Idea improving over the past few months and the possibility that Vodafone PLC will sell its stake in Indus and inject capital into Vodafone Idea, the chances of the company using the conversion option. Government contributions to stocks are low, in our opinion. in Vi could also pave the way for a 2-player market, which Vi (and the government itself) may want to avoid. ‘

The government converting its spectrum and Adjusted Gross Income (AGR) into equity would not strategically change anything in the management of Vodafone’s business prospects at any time. “This can be read simply as a bailout to keep Vodafone in survival mode when it would avoid the risk of immediate danger of bankruptcy,” said Prashant Tapse, vice president (research) at Mehta Equities Ltd.

Will government ownership hamper capital mobilization and slow growth? Tapse said: “After this conversion and dilution of the shares, I don’t expect the government to take an active role in any of the investment plans that are due on the books. Once the business begins to perform well in terms of operations and profitability, the company may seek to raise funds through QIP or Right Issue in which the government may or may not participate. Telecommunications as a sector, growth is intact with the increase in ARPU between actors. Now with the clarity to come, the government becoming co-owner does not have a negative impact on the company. We advise risk-takers to continue to hold while investors conservatives can avoid that, ”he added.

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Posted: Wednesday January 12, 2022 10:36 am IST

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