Merge Vodafone Idea, BSNL to avoid another bankruptcy: Deutsche Bank

bankruptcy Vodafone Idea
A house of cards. Image by Sebastian Bass | Bigstockphoto

Brokerage Deutsche Bank said that the Indian government must convert Vodafone Idea’s debt into equity by merging it with state-run Bharat Sanchar Nigam (BSNL) in a bid to save the struggling telco from going bankrupt. The government can then provide Vodafone Idea with a clear commercial mandate based on profitability targets and incentives.

India’s Supreme Court last week ruled out any relief on its huge adjusted gross revenue (AGR) dues. The telco, which has said that reduction in AGR dues is the key factor to ensure its viability, is now considering filing a review petition in the Supreme Court.

“…the only viable solution is for the government to recapitalise Vi by converting its debt into equity, preferably while merging it with BSNL, and then providing it a clear commercial mandate based on profitability targets and incentives,” the brokerage said in a note.

“Should this happen, Vi shareholders would be heavily diluted, as government debt is roughly six times the current market cap. But such a solution might be an acceptable outcome to shareholders, with a $20 billion enterprise value feasible and non-dilutive…the alternative appears to be either bankruptcy or permanent over-management of the sector,” analysts at Deutsche Bank said.

The vast majority of Vodafone Idea’s debt is spectrum and AGR obligations, and the company will need to take on 5G spectrum at some point.

Vodafone Idea owes the Indian government over $20 billion in AGR and deferred spectrum payment dues. Its net debt stood at $24.32 billion, and its cash balance was just $47.3 million in the quarter ended March 2021.

Deutsche Bank termed India as the most painful market for telecom companies.

“A long history of extracting as much as possible from the sector has left a legacy of repeated business failures – including the largest bankruptcy in Indian corporate history, Reliance Communications. That is likely to be trumped by Vodafone Idea,” analysts at the brokerage said.

Private investors are not likely to save the company, given successive governments seeing telecom capital as something to target, analysts added.  “It [government] needs to make a call, (either) state control of Vi or duopoly, as the alternative appears to be bankruptcy, as private investors are extremely unlikely to save the company,” they added.

Vodafone Idea’s co-promoters, UK’s Vodafone Group Plc and the Aditya Birla Group, own 44.39% and 27.66%, respectively. Both co-promoters are now open to the option of doing away with a majority stake in Vodafone Idea or even transfer control to a strategic investor.

“VIL may be able to raise money through monetization of a few assets, but we doubt if the amount will be adequate to cover for its annual commitment against long-term liabilities related to AGR dues and spectrum,” ​​analysts at Kotak Institutional Equities said in a separate note.

Kotak said that the telecom operator might require another moratorium from the government on spectrum payments, a material reduction in license fees and spectrum usage charges, coordinated tariff hike in the industry and capital raise and asset monetization to sustain in the highly competitive market.

The telco’s cash flows are likely to fall short by at least $3.1 billion in FY2023, given an AGR instalment of Rs 9,000 crore ($1.2 billion), spectrum payments of Rs 15,900 crore ($2.15 billion), an interest cost of Rs 2,500 crore ($338 million) on the non-government borrowings and low run-rate of capital expenditure at Rs 6,200 crore ($838 million), Kotak said in its analysis.

Vodafone Idea’s management and its promoters group are currently in talks with five investors, both strategic and financial, including three US-based funds. The talks revolve around selling a combination of Vodafone Idea shares and convertibles to raise money. The Indian government recently approved a proposal from Vodafone Idea for an investment of up to Rs15,000 crore ($2.03 billion) through the foreign direct investment (FDI) route. 

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