(Bloomberg) — Shares of Vodafone Idea Ltd. dropped after its board approved a rescue plan that gives almost 36% stake to the Indian government in lieu of past dues and makes it the largest shareholder in the unprofitable wireless phone operator.
The restructuring in which some of the government dues will be converted to equity will result in dilution for all existing shareholders of the company including the founders, India’s no. 3 wireless carrier said in an exchange filing Tuesday. Vodafone Group Plc will own around 28.5% and Aditya Birla Group will have about 17.8% in the company after the conversion, it said.
An Indian government representative did not offer any immediate comments on the proposed plan. Vodafone Idea’s shares plummeted almost 21% in Mumbai on Tuesday — most since March 2020 — while the benchmark S&P BSE Sensex advanced 0.4%.
The equity conversion plan gives the Narendra Modi-led government more skin in the game in rescuing Vodafone Idea as well as removes the need for any immediate cash outgo from the beleaguered wireless operator. The carrier, which owes 160 billion rupees ($2.2 billion) to the state exchequer for spectrum and other dues, hasn’t reported an annual profit since Reliance Jio Infocomm Ltd. sparked a brutal price war in 2016.
While the move avoids bankruptcy for the joint venture between the Vodafone Group and billionaire Kumar Mangalam Birla’s conglomerate, it’ll be a stopgap measure for the company that’s been losing customers in droves. Investors will also be concerned about what the sudden change into state control means.
Stave Off Bankruptcy
“While this would stave off the immediate danger of bankruptcy, it does not augur well for any equity investor in a private company” in the company, said Utkarsh Sinha, managing director at consultancy Bexley Advisors in Mumbai. “Obvious concerns about its performance as a semi-state run unit aside, this sends a very negative signal to the business community.”
Its subscriber base had whittled down to 253 million in the quarter ended Sept. 30 as it posted another quarterly loss. Birla had offered to hand over his stake in Vodafone Idea to the government in a June letter last year in a bid to keep the carrier afloat, according to a local news report.
Amid industry strife, India in September last year gave operators more time to pay government dues and the option to convert the back fees into equity if needed — an option that Vodafone Idea has now exercised after struggling to raise funds.
The carrier announced plans in 2020 to raise as much as 250 billion rupees to help the company win airwaves in a planned spectrum auction as well as boost its telecom infrastructure. It was hopeful of being able to raise funds after the relief package from the government but hasn’t had much success so far.
(Updates with closing share prices in the third paragraph.)
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