Vi revival: Third Time’s The Charm

In the world’s second largest data consumption market, a three-year-long corporate cliffhanger has come to an end.

Vodafone Idea, ranked smallest of three players in India but sixth largest by country subscribers in the world, has raised 180 billion rupees ($2.16 billion) in a bid for revival.

The share sale drew some marquee institutional investors and filled over 90% of the retail investor quota. The funds will allow long-needed investments in a business that’s bleeding customers.

It’s India’s largest follow-on public offer and a very significant step in the revival of Vodafone Idea, said Anil Singhvi, a corporate sector veteran and chairman of Ican Investment Advisors. It may not cover all the company’s needs, but moves it from a vicious cycle to a virtuous one, he said.

Turnarounds are common. Yet this one is marked by a billionaire promoter who played hardball, a multinational telecom partner that’s all but thrown in the towel and a government that’s turned from villain to hero.

It’s also a story that speaks of the policy risks of doing business in India — where in 2012 a corruption charge against the UPA government and subsequent license cancellation by the Supreme Court shrank the number of players in telecommunications by more than half. Then the launch of Mukesh Ambani-led Reliance Jio’s deeply discounted service in 2016 hurt the profitability of those remaining while sparking a data consumption boom.

In 2018, Vodafone India and Idea Cellular, an Aditya Birla Group company, merged to survive. Still, a year later the industry was slammed again when the government won a case for additional revenue share.

By 2021, India’s telecom industry was “down to 2.5 players” as telecom tycoon Sunil Mittal famously put it, pointing to Vodafone Idea’s distress. India deserves to have (at least) three players, the founder of Bharti Airtel, India’s second largest telecom company, had said at a conference.

Later that year, as Vodafone Idea teetered towards bankruptcy, its billionaire chairman Kumar Mangalam Birla (chairman of the Aditya Birla Group) quit the board and offered to give away the company to the government. He returned only in April 2023 after a government rescue package allowed telecom firms to pay their dues in equity.

The government is now a 32% shareholder in Vodafone Idea, the only company to avail of the debt-to-equity conversion option. That stake will fall to about 23% after the fundraise.

Ordinarily, a government rescue of a private company would be met with criticism but this is being viewed as redemption for past policies and necessary to maintain competition in a sector critical to India’s economic growth. It was a commercially wise decision taken by the government and, over time, the equity will pay off, Singhvi said.

How it will pay off is still not fully clear, say analysts.

Besides the 200 billion rupees in equity, Vodafone Idea hopes to raise another 350 billion rupees via debt and non-funded credit lines, an official close to the process said to me — all of which will be invested over three years in improving network coverage and launching 5G services (Jio and Airtel are far ahead in their 5G rollout).

This could help stem customer loss and boost revenue by graduating the 40% customers using 2G to 4G.

But the company still has 700 billion rupees of spectrum and other fees due to the government by 2027-28 and more thereafter. It hopes to pay some of this too in equity if allowed.

Vodafone Idea has put paid concerns of its survival and competitiveness but it’s not viable yet, Ambit Capital said in a report this week. It will take more funds and a stronger network and revenue flow, the report said.

Every saint has a past and every sinner a future, Singhvi said, when I asked him if top funds and retail investors participating in the fundraise were throwing good money after bad.

That future depends mainly on government forbearance and tariff hikes.

Indians consume on average 20 gigabytes per mobile connection per month — among the highest worldwide. But they pay among the lowest prices — half of what Russians pay, a third of what it costs in China and a twentieth of the price in the US.

Average revenue per user in India has increased just over 4% a year between 2012 and 2023, a Vodafone Idea investor presentation shows.

Airtel too has called for a tariff hike but when and how much will depend on competitive intensity and Jio’s IPO plans.

If data costs do indeed rise significantly, then, between consumers, government and new investors, this will go down as a rare public-funded comeback of a private enterprise.

Some solace for the Birla Group and Vodafone that have invested more than $20 billion dollars in their telecom ventures, now worth about a third that. Bloomberg