Vodafone Idea is readying a $3.5 billion warchest to take on Jio-- and markets are cheering


  • The board of directors at Vodafone Idea have approved a ₹250 billion fund raising plan.
  • This is expected to be the largest ever rights issue in the Indian corporate sector.
  • The funds will enable Vodafone Idea to take on market incumbents Jio and Airtel more effectively in terms of capital expenditure and low prices.

The board of directors at Vodafone Idea have approved a $3.5 billion ( ₹250 billion) fund raising plan that will give the recently-merged telecom services behemoth enough ammunition to take on the mighty Reliance Jio, owned by the richest man in Asia, Mukesh Ambani.

This is expected to be the largest ever rights issue in the Indian corporate sector. In addition to enabling Vodafone Idea to take on market incumbents Jio and Airtel more effectively in terms of capital expenditure, the proceeds of the issuance will also be used to cull Vodafone's debt burden.

Nearly two-thirds of the funds to be raised, or about $2.5 billion, will be secured from the promoter group Vodafone and Aditya Birla Group. Vodafone India's parent will provide $1.5 billion while the Aditya Birla Group will provide the remainder. Furthermore, if any portion of the rights issue is unsubscribed, the promoters will take up the slack.

Investors reacted favourably to the commitment of the company's largest shareholders as the shares of the merged entity were up 3.5% when the National Stock Exchange opened this morning. Vodafone owns a 45.2% in the combined entity while the Aditya Birla Group owns 26%.

After the completion of their merger last year, Vodafone-Idea, which began operations on 1st September, became India's largest telecom services provider by market share (32%) and subscribers (422 million). However, the entity's growth in revenue and subscribers significantly trails that of Jio and Airtel.

In fact, it even lost 6.5 million subscribers between September and October 2018, according to a report by the Telecom Regulatory Authority of India.

The funds will help it sustain low prices and match the deals offered by its competitors. Analysts are unsure, however, whether ₹250 billion will be enough for Vodafone Idea to take on Jio, which spent ₹140 billion on capex alone in the quarter ended December 2018. The merged entity might be compelled to undertake another rights issue or a bond sale later in the year.

Reliance Jio’s entry into the telecom market in September 2016 had triggered an intense tariff war, driving down the cost of data in the world’s second largest market with over a billion mobile phone subscribers.

While customers rejoiced, Jio's competitors were forced to contend with a loss of profitability and market share. Nearly two years into the battle for dominance, Jio with its deep pockets has kept the ante up while many others have bled to irrelevance.

SEE ALSO:

Idea and Vodafone are a step closer to becoming India’s largest telecom operator

Two years on, Reliance Jio continues to dominate Indian telecom market, beating global giants
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