A surprising and unexpected move by the government.

Vodafone Idea Ltd. said the Indian government will own almost 36% in the country’s third-largest wireless phone operator after its board approved conversion of dues into equity.

This will result in dilution for all the existing shareholders of the company, including the founders, the unprofitable wireless carrier said in a stock exchange filing. Vodafone Group Plc will own around 28.5% and Aditya Birla Group will have about 17.8% in the company, it said.

This rescue plan was crucial for Vodafone Idea, a joint venture between the Vodafone Group and billionaire Kumar Mangalam Birla’s conglomerate, which has been losing customers to bigger rivals. Its financial health deteriorated after Reliance Jio Infocomm Ltd.

Government, at its sole discretion, may convert any part of such loan to preference shares instead of equity shares and such preference shares may be optionally or compulsorily convertible and/or redeemable and/or participating in nature. The shares may be held through the statutory undertaking of the Unit Trust of India (SUUTI) on behalf of the Government of India or by any trustee-type or other suitable arrangement, the Department of Telecommunications (DoT) had said.

Industry responds
“The move of conversion to equity, of its debts relating to interest due on spectrum in favour of the Government, by Vodafone Idea is indeed very surprising and unexpected. While the move will definitely keep the company afloat for some time, however, from an overall sustainability perspective of business and expansion, with the current shareholders, the promoter Vodafone plc. and the other significant shareholder Aditya Birla Group now becoming lesser stakeholders in the company, it remains to see how this will improve. It is unlikely that the business will sustain a long period, unless the Government comes out with a definitive plan of reviving the business of Vodafone Idea in consultation with the existing shareholders. Whether the Government may contemplate a move of combining the businesses of Vodafone Idea with BSNL, such as a merger and thereafter looking for a purchaser, is something that remains to be seen, given that the BSNL auctions have hit several roadblocks over the last few years,” said Tony Verghese, Partner, J Sagar Associates (JSA).

“While this would stave off the immediate danger of bankruptcy, it does not augur well for any equity investor in a private company” in the company, said Utkarsh Sinha, managing director at consultancy Bexley Advisors in Mumbai. “Obvious concerns about its performance as a semi-state run unit aside, this sends a very negative signal to the business community.”

“In 12-18 months the situation will rapidly change, and the delay at Vodafone Idea to find fresh equity investments will further weaken their competitive market position. Overall, in the short term I don’t see any big investors putting their money in the telcos,” Nitin Soni, Senior Director, Corporates at Fitch Ratings.

“From the sector perspective it is clear that the market will not shrink to two players … the government coming in doesn’t change anything in terms of a competitive landscape as they are not infusing any capital,” Ambit Capital analyst Vivekanand Subbaraman said. CT Bureau