Government to become single largest shareholder of Vodafone Idea

Vodafone Idea government stake: The Indian government will own a 36 percent stake in Vodafone Idea, the country's third-largest wireless phone operator in a new rescue plan. The news came after the company board during its meeting on January 10th approved the conversion of the full amount of interest related to spectrum auction installments and Adjusted Gross Revenue (AGR) Dues into equity.

The conversion will result in dilution to all the existing shareholders of the company, including the founders and promoters. After the conversion, while the central government will own about 35.8% of the total shares of the company, Vodafone Group Plc will own around 28.5 percent stake and Aditya Birla Group will own about 17.8 percent stake.

The move will provide immediate cash flow relief to the company and held them expand their 4G spectrum, as per experts. The Vodafone Idea shares fell nearly 19 percent today to Rs 12.05 per share on NSE, before partially recovering. The net present value of interest is expected to be about Rs 16,000 crore, subject to confirmation by the Department of Telecommunications.

The equity shares will be issued to the government at a par value of Rs 10 per share as the average price of the company's share at the relevant date of pricing of equity shares -August 14, 2021 was below par value. This is also subject to final confirmation by the Telecommunications Department. 

Vodafone Idea Rescue Plan 

The latest rescue plan is crucial for Vodafone Idea, as it has been losing customers to its bigger rivals, Reliance Jio and Airtel. The Department of Telecommunications (DoT) had provided various options to telecom firms in October 2021 as a part of its Telecom Reforms Package to clear their dues.

One of the offers was to defer payment of spectrum auction installments and AGR-related dues by four years. The Vodafone Idea board accepted the offer and approved deferring payment of spectrum auction installments & AGR dues by 4 years in October 2021.

The latest development comes as rival telecom operator Bharti Airtel said it will not avail the option of conversion of the interest on the deferred spectrum and AGR dues into equity. The company agreed last week to pay the interest on the deferred spectrum and adjusted gross revenue liabilities.

Vodafone Idea - All you need to know!

Vodafone Idea was created after the merger of Vodafone India and Idea Cellular on August 31, 2018. The merger created India's biggest telecom service provider with over 408 million subscribers. The company was renamed as Vodafone Idea Limited. Both Vodafone and Idea brands continued to operate under their respective names under the merged entity. 

Vodafone and Idea brands re-branded themselves under a new brand identify 'Vi' on September 7, 2020. The new brand identity was launched to enable unified consumer positioning. The new Vi brand identity aimed to position itself as a strong, ever-dependable, agile and intuitive brand. 

Read more: Vodafone-Idea Merger

Read more: Vodafone Idea rebranded as 'Vi'

Vodafone Idea Cash Issues

The financial health of Vodafone Idea has suffered right from when Reliance Jio Infocomm Ltd. sparked a brutal price war in 2016 and quickly became the top player in market share. 

Reliance Jio's takeover of the telecom market led to huge losses for other telecom operators, who quickly lost their loyal consumer base. 

Despite the merger, Vodafone Idea faced three issues of cash flow, profit and loss and weak balance sheet. In short, the company faced major losses and was cash strapped, which halted its expansion efforts. The company has continued to lag behind Reliance Jio and Bharti Airtel.

The company tried different ways to address its financial stress, it even raised tariffs by 20 percent in November 2021. The decision followed Airtel's announcement of a 20-25 percent hoke in tariffs from November. Though the move was positive it did not fully resolve the company's liquidity issues. 

The latest development will address the cash flow situation of the telecom operator for the next four years at least.

However, the challenge now would be to get onboard new investors as rivals Reliance Jio and Bharti Airtel have strong balance sheets. The situation is expected to rapidly change in 12-18 months and if Vodafone Idea fails to find fresh equity investments, it will further weaken its competitive market position.