Govt may end up with 30-70% equity stake in Vi after 4 yrs

The government could hold anything between 30-70 per cent in Vodafone Idea (VIL) based on an assumed share price of ~10, say analysts, thanks to an equity option offered by the government for converting the company’s dues after a four year moratorium.

While the final details are still being worked out by the Finance Ministry, the proposal comprises two options. In one, operators have been given the option to convert their interest dues on spectrum and AGR payments, after a four year moratorium, into equity to the government.

In the second, only the government has the option to convert the principal amount into equity, to be paid as instalments for spectrum and AGR dues for four years after the moratorium.

The move has been questioned by many analysts who say that if both options are taken, it will turn VIL into a government company. This in turn would dissuade potential strategic investors from investing in VIL which has been looking at raising ~25,000 crore from investors. So far, it has failed.

Sunil Mittal, chairman of Bharti Airtel, also said such a development would be unfortunate considering that the government has given a package which he expects will help VIL pay back its instalments on spectrum and AGR after four years without recourse to this method.

As far as Bharti is concerned, Mittal said only the board will decide whether it will take the equity option for paying interest which would only give the government a very small stake in the company.

However, VIL’S shares went up today by 27.37 per cent to close at ~11.40. The government’s equity share in VIL could, of course, go down if its valuation goes up in the next four years. But sources close to VIL say that the solution provides all stakeholders with the assurance that the company will continue to be a ‘going concern’ – an issue which has been raised by VIL’S auditors several times during its financial results as well as by the firm’s management.

“The government has ensured that it will not allow a duopoly in the private telecom sector and will back the company even if the financial challenges continue after four years. It’s a huge positive signal and will make getting an investor easier,” said a source close to VIL. J M Financial also points out the equity option gives further cushion to VIL in case of an adverse event such as tariff stagnation in the next four years.

A similar message was also given by Communication and Electronics & Information Technology Minister Ashwini Vaishnaw while announcing the package. He said the government is keen to get more players in the sector to ensure competition.

Based on ICICI Securities data, the interest dues that VIL has to pay on AGR and spectrum payments after four years comes to ~9400 crore. With a market capitalization of ~30,000 crore, based on a share price of ~10, a conversion of this amount to equity will give the government a 30 per cent stake in VIL.

The other option which will be with the government is to convert the spectrum and AGR dues, apart from interest, and then the outgo goes up to ~110,200 crore. This would push the government’s equity holding to 70 per cent on a CMP of ~10 per share.

Credit Suisse agrees with ICICI Securities’ analysis, saying that the move will result in the government having a 70 per cent stake at a current market price of ~9.

The outcome will be VIL becoming a ‘government entity’ with the government as the largest shareholder. A senior analyst of another brokerage firm said: “No one likes a government running or interfering in a private telco. They already have BSNL/MTNL to fix. It would slow down decision-making and this was seen in companies like Tata Communications in which the government had a stake.”

Brokerage house Emkay has raised concerns that a substantial dilution in equity ‘might restrict potential equity infusion from any financial or strategic investor’. After all, VIL has been seeking an infusion of ~25,000 crore. Given that its efforts have failed to bear fruit, the Centre becoming the largest shareholder could just further deter anyone who might be interested in investing in it.