The two owners of Vodafone Idea, ie Vodafone PLC and the AV Birla group have announced they are not able to run the telecom company anymore given its massive debt and slim revenues and earnings ( details in box). Vodafone has formally said it is not in a position to put in more equity and has written off its massive $30 billion investments. Likewise, if KM Birla’s letter to the Cabinet Secretary on June 7 is any indication, the group has accepted the write-off of its equity and is seeking a way out of the company.
One obvious option is to let the company implode as Reliance Communication did. Don’t do anything, customers will continue to migrate; the company will default on its payments in a year or earlier, and eventually, employees too will quit and the company will contract into a tiny shell, much like RCom.
What are the losses if this option is chosen:
1. The government loses Rs 1.5 lakh crore due to it.
2. Banks lose about Rs 28,000 crore of their loans.
3. 10,000 odd Vodafone employees lose their jobs.
4. Over 250 million people have to port out to another phone company.
5. Vodafone will lose $30 billion and AV Birla group about Rs 10,600 crore.
Vodafone is a big loser, but as we said, it has already written off its losses, as must have AB Birla group. Banks are more or less reconciled to losing Rs 28,000 crore. For individual banks like IDFC First and Yes Bank it is a slightly serious hit, but not a systemic issue. Clearly, the biggest loser is the government — it loses Rs 1.5 lakh crore of the spectrum and other dues. Besides the reputation risk that one of the largest FDI investments in the country to date ended up as zero, and hence India is a treacherous market to invest in.
Assuming the government wants to lose neither all of the Rs 1.5 lakh crore dues nor its reputation, here’s a solution. Can the government attempt a Satyam-like resolution? When that marquee software company of the late nineties was faced with implosion, the government stepped in under the company law board, appointed a committee of three financial and IT specialists who called for bids and sold off the company successfully to Tech Mahindra. India’s reputation as a home of software giants was preserved.
Now, as well the government can follow the Satyam script: It can appoint a committee of financial wizards: say Uday Kotak, a prominent former telecom secretary or even the current cabinet secretary and maybe a former SEBI official. The trio can do the math: Write down the equity capital entirely and seek bids from white knights with the company going to the one who claims the smallest debt haircut.
A similar process can be initiated through the NCLT, but this process is prone to delays. It is essential the process takes no more than a few weeks since neither customers nor employees nor vendors must abandon the ship. A high-powered committee with government backing will be seen as reliable and will be quick. It’s possible a white knight emerges who is willing to accept Rs 1 lakh crore of the debt, given the attraction of over 250 million subscribers. Even if the best bid seeks to pay back Rs 50,000 crore, the government comes out better than if the company implodes. Now, will the government take that route?
The Vodafone Idea debt-equity math
Debt at Rs 1.79 lakh crore as of March 2021
—Govt debt at Rs 1.5 lakh crore
—Bank debt at Rs 23,000 crore
—Annual AGR installment Rs 9,000 crore
—Spectrum dues, payable in FY2023 at Rs 15,900 crore
—Interest cost on bank loans Rs 2,500 crore
—4QFY21 annualised capital expenditure Rs 6,200 crore
—Total annual commitments: Rs 33,600 crore
Total Annual inflows
—Rs 10,100 crore
—4QFY21 annualised EBITDA post lease payments Rs 8,700 crore
—Incremental cost savings as per guidance Rs 1,400 crore
Annual gap at Rs 23,500 crore (~$3.1 billion)
Investments made by promoters
Aditya Birla group has invested ~Rs 10,500 crore since IPO
—April 2019: Right issue Rs 7,250 cr at Rs 12.5
—January 2018: Preferential issue of Rs 3,250 at Rs 99.5
Vodafone investment estimated close to $30 billion in India, according to analysts
—This includes stake to buy Hutchison, Piramal stake, Money into the company.
Source for all numbers: Kotak Securities
(Edited by : Ajay Vaishnav)
First Published: IST