Earlier in June, KM Birla, the chairman of Vodafone-India caused a stir in all the media with a small piece of the letter he wrote to the government. This is because this little piece of the letter contained a fairly large offer. Well I know you’ve heard it before, but it’s no secret that we are amazed and won’t hesitate to say it again. The chairman of Vodafone-Idea has offered to sell his stake in the telecoms giant to the central government. This offer was his attempt to save the company from drowning because frankly there aren’t many other options available to management. The stake was therefore conditional. KM Birla has offered the global 27 percent stake it owns in Vodafone-Idea to any public sector, government or financial entity, if the government thinks it can save the telecommunications company.
What was in the letter?
There was something very intriguing about this letter to the Cabinet Secretary. He read that the company had tried to raise INR 25,000 crore from various investors. However, to achieve this, said investors need to be reassured by the government as to their desire to have a telecommunications market with three players. But isn’t that already the government’s public position? Well, the demand has been made for clear intention through active and positive actions on long standing demands. These demands include clarification of the adjusted gross revenue liability, the proper moratorium on spectrum payments and, more importantly, a floor pricing regime above the cost of service, as mentioned in the letter written by KM Birla.
These demands come into effect after the company’s skewed financial results, and the company continues to find itself in an even worse predicament, to the point where it could be brought to an “unrecoverable point of collapse” if the government does not display active participation. in maintaining a three-player market. Well, it was all about the content of the letter. But, the main question is still unanswered, the why. And if that does eventually happen, what will happen to the business in the long run?
What is the position of Vodafone-Idea which forced KM Birla to offer its participation in the government?
We just mentioned that the company’s finances are in a very vulnerable position and could collapse if no help is sought. Well, this is because Vi has been in debt by INR 1.5 lakh crore since the data was last released. KM Birla’s request for clarification of the adjusted gross revenue liability is the INR 60,000 crore the company owes to the Ministry of Telecommunications, as reported by the company’s balance sheet as of March 31 of this year. Along with this, the company’s obligations to banks and financial institutions include INR 96,270 crore of deferred spectrum bonds and INR 23,000 core other liabilities.
But wait, what clarity on the issue of adjusted gross income? Did the Supreme Court not rule in favor of the permanent definition of adjusted gross income for the Ministry of Telecommunications in 2019? Well, yes, they actually did. And that’s when the company said that if the company does not get government assistance on the adjusted gross income liabilities, it could go out of business. This request has just been reiterated with this letter. Thus, more than clarity, the company seeks to redeem itself.
So all in all, it can be said without a doubt that this recent letter from KM Birla is his latest attempt to save the drowning ship, and well, it looks like the rescue tube is not coming close. The company is on the verge of financial ruin and the whole country is witnessing it one day at a time.
But, it looks like the letter also had a hidden message. KM Birla, in his letter, suggested that the foreign investors in question seek validity and active government support for a three-player market. Specifically, he implicitly alluded to the lack of interest of foreign investors in investing their money in India’s telecommunications sector until the government sends clearer instructions.
And I don’t know if that was one of the president’s agendas, but after KM Birla’s offer to divest his stake in the company, the company’s share fell by more than 10%. Does this mean the market is bullish on which government is running the reins? I guess we’ll have to wait and see.
Can the Ministry of Telecommunications take back Vi?
Well, experts think the answer is yes. This is because the business falls under a strategic sector, allowing the government to intervene critically if necessary in the public interest. And to be fair, experts think it might be Vi’s only face saving way. According to a recent report released by Deutsche Bank, Vi’s probability of survival is highly dependent on the government’s willingness to convert its debt into equity and to merge operations with a financially stable state-owned enterprise, such as Bharat Sanchar Nigam Limited. . (BSNL). However, this also comes with a clear directive of the need for the government to represent its active participation in maintaining a three-actor sector.
But if that happened, what would happen to the shareholders?
Well, before I comment on this question, let me reiterate the fact that government debt is about six times Vi’s current market cap. This means that if this were to happen, the shareholders would be effectively diluted, no doubt. So the right assessment here would be to see if this is the right action to take. Well, based on the predictions made for the future of the business, if the giant is saved this way, experts suggest that would be an acceptable outcome.
“If that were to happen, Vi’s shareholders would be heavily diluted, as government debt is roughly six times the current market capitalization. But such a solution could be an acceptable outcome for shareholders, with an enterprise value of $ 20 billion achievable and non-dilutive, ”the Deutsche Bank Research report of July 26 said.
However, do you think the government can afford to take over a business and get rid of this debt? Especially after the COVID-19 crisis, which reigned like a thunderclap over the government’s fiscal resources. So, at a time when the government is abandoning its stake in many public sector companies and offloading its tax burden, experts suggest that it is almost pointless to even consider the likelihood of a government takeover. .
Where is Vi going in the long run?
To be honest, if the push comes to pushing, it’s hard for Vi to even have a long run. This is because the company’s finances, as explained above, are depleted by debt and the company’s exit routes seem to be closing. To keep the business afloat, it is, if tacitly mentioned, necessary to raise funds in the coming months. . That itself would only help him maintain operations, debt reduction lasts much longer.
And since the prospects for a government takeover are almost negligible, it is important for the company to increase tariffs in the short term to cover its operating cost. Government assistance would still be needed to secure some relief from the adjusted gross revenue liability and other obligations such as spectrum payment liabilities. As explained earlier, fundraising is also a difficult task, as the needs of investors also depend on the will of the government.