Government owning Vodafone Idea is just half the task – the other half is to find the money

• Vodafone Idea today announced the conversion of interest on its spectrum and AGR dues to equity, making the government the largest shareholder.
• The government intervention might help Vodafone Idea raise debt to fund its business, but finding equity investors still remains a major task for the telco.
• Analysts are divided on the matter, with some suggesting that this could prove to be a useful intervention for the sector as a whole, while others expressed apprehension over the government’s ability to steady the ship.

The Indian government has done what many experts and analysts did not think it would – pick up a stake in a telecom operator that was on the brink of a collapse just a few months ago. The message is loud and clear – the government does not want the Indian telecom sector to become a duopoly of Reliance Jio and Airtel.

However, the market response to the announcement was brutal – Vodafone Idea’s shares dipped by as much as 19% in early trade yesterday (January 11). As of 3:30 p.m., it was down by over 20%, suggesting that the market is spooked by the government’s entry as a shareholder.

What is on street’s mind

The likely question that the market is asking is, does the government need to own yet another telco? The government’s ability to steer the ship of Vodafone Idea and government-run BSNL together might be reason enough to doubt, as an investor, but this does not have to be the case if the government leaves Vodafone Idea’s management alone.

Glass half full?

On the flipside, some analysts believe this could actually prove to be useful for the stakeholders of both Vodafone Idea and BSNL MTNL – the subscribers, investors as well as the government.

Deven Choksey, the managing director of KRChoksey Shares & Securities, says that a merging Vodafone Idea with BSNL could prove to be a timely decision, especially with the 5G era almost here. Vodafone Idea’s wireless coverage and BSNL’s pan-India wired coverage could complement each other very well, and help both the companies take on rivals Reliance Jio and Airtel.

"If Vodafone Idea and BSNL enter into an asset sharing (active / passive, Inter Circle Roaming) agreement on 2G, 4G & later 5G, it could end up being a win-win for both the companies, allowing both the companies to leverage each of their assets then its their customer base which will benefit," said Errol Dale Pinto, former circle enterprise head of Vodafone Idea.

"This is likely the best arrangement for Vodafone Idea, allowing it to lighten the burden on its books and avoid the interest costs, clearing the path for its profitability & between PE Funds & the Govt, the latter works out better in control & manoeuvrability for the revival of VI," he added.

Easier said than done

However, realising these synergy gains is easier said than done. Some analysts believe that the government picking up a stake in Vodafone Idea ‘might be a remedy worse than the disease’.


“Converting Vodafone Idea into a government company, or merging it with a government company might probably be a remedy worse than the disease,” said R Chandrashekhar, former secretary of Telecom and Information Technology, in an exclusive interview with Business Insider in August last year when talks of a telecom relief package were still doing the rounds.

And then there’s the massive elephant in the room – the problem of a culture clash.

“Bringing together an Indian company, a global company culture and a public sector company’s culture together, and managing the fate of those 1 lakh public sector employees – who in the private sector has the wherewithal to do it?” asked Sanjay Kapoor, former chief executive officer (CEO) of Bharti Airtel, in an interview last year.

Who will fund Vodafone Idea’s capex?

What Vodafone Idea needs now is to spend on expanding its network capabilities and gearing up for the 5G era – and this means it needs money right now. The recent tariff hikes might have helped ease the short-term cash flow crunch to a certain extent, but it needs more than just a short-term boost.

“Vodafone Idea is still not investing enough on capex. They still have to look for equity investors, and at least increase their capex investment in line with Bharti and Jio,” said Nitin Soni, senior director at Fitch Ratings in a conversation with CNBC-TV18.

According to Dale, a robust 5G launch would need a Telco to invest around ₹20,000-25,000 crores including capex, spectrum & critically a maximum Fibre backbone. With this announcement, the telco fulfils a significant portion of that requirement and makes it 5G Auction ready.

Too little, too late and too slow?

While a Vodafone Idea-BSNL merger could theoretically be pulled off, it might still be too little, too late and perhaps too slow in a sector that moves as fast as telecom.

Especially, when considering the fact that Vodafone Idea has lost nearly 64 million subscribers since the beginning of 2020.

Both Reliance Jio and Airtel are blazing past with their 5G investments and partnerships – Jio announced a partnership with Google back in June last year, while Airtel has conducted its own 5G trials already, in addition to demonstrating enterprise use cases. For what it’s worth, Vodafone Idea joined the party, too, albeit a little late.

While Vodafone Idea is still in talks with vendors for sourcing 5G equipment, its rivals Jio and Airtel are a little ahead, having either received approval or receiving confirmation from vendors like Nokia and Ericsson.

However, Choksey says that by converting the spectrum and adjusted gross revenue (AGR) dues into equity, Vodafone Idea now has more room to borrow money. Money that it could use to fund its capital expenditure for improving its network quality, investing in new technologies and bidding for the upcoming 5G spectrum.

The government has helped Vodafone Idea to survive, but to thrive it needs money and it needs it now.

While analysts are divided on how this will work out for Vodafone Idea’s stakeholders, the next few months are going to prove critical for the telco’s future.

Update: A report by The Economic Times states that the government does not want to run Vodafone Idea’s operations, citing unnamed senior government officials.

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Government picking up a stake in Vodafone Idea ‘might be a remedy worse than the disease’, say experts

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