Could Vi Finally Join Jio & Airtel as a 5G Service Provider?

In the rapidly swaying waters of the Indian telecom sea, both primary and small players are trying to stay afloat. Big fish like Reliance Jio & Bharti Airtel are more experienced in handling the changing winds; whereas the joint force of Vodafone Idea is still finding its footing.

Despite being rebranded as “Vi” in 2018, Vodafone Idea is still looking for that ace that will help it look eye-to-eye with its competitors. And today, it seems like Vi has finally found it!

Sources close to the company told Moneycontrol that Vi intends to launch a Follow-on Public Offer (FPO) at a price band of ₹10-11 per share between 18-22 April in 2024. They aim to raise ₹18,000-20,000 crore. This would be the largest FPO ever conducted in India.

That's not all! Vodafone Idea has allotted shares worth ₹2,075 crore at the issue price of ₹14.87 per share to Aditya Birla Group's subsidiary Oriana Investments Pte. Ltd.

Finally, after almost 7 years, Vodafone Idea might have found a light. Through this, Vi is planning to finally provide 5G services to its customers and join the race of the best. The journey to reaching this level was not easy.

In this article, we will learn what new tactic Vi has up its sleeve and whether it would be enough to pay off lakhs of crores of debt.

First, let's start with the pilot episode of "From Where It All Began?"

Vodafone Idea's Fight for Survival: How it Started?

Vodafone Idea has navigated a complex financial landscape since its formation in 2018. Let's first examine the reasons for both telecom companies' joining hands.

Reasons for Merging Vodafone & Idea

Vi, initially named Vodafone Idea Limited, was formed in 2018 by merging two major Indian telecom companies: Vodafone India and Idea Cellular. The primary reason for this merger was a combination of factors:

a. Economies of Scale:

Vodafone India and Idea Cellular could achieve economies of scale with this merger. Combining their resources, such as infrastructure, network coverage, and subscriber base, would lead to cost efficiencies and a stronger market position.

b. Improved Network and Service Offerings:

The merger aimed to create a more robust telecom network with broader coverage and better customer service. Combining their resources would allow them to invest in network upgrades and offer more competitive data plans and call packages.

c. Growth Potential:

The merger aimed to leverage the strengths of both companies. Vodafone India brought its global expertise and brand recognition, while Idea Cellular had a strong presence in rural markets. This collaboration could help them capture a larger market share and drive future growth.

d. Regulatory Landscape:

The Indian telecom industry was undergoing consolidation at that time. The government's policies indirectly influenced the merger decision as a way to maintain a healthy number of major players in the market.

From Merger to Misfortune: A Timeline

Here's a look at the key milestones in its journey:

2018: A New Partnership

VIL emerged from the merger of Vodafone India and Idea Cellular. The goal was to create a stronger competitor in the face of a growing telecom market. However, the industry was already experiencing a price war, squeezing profit margins. Additionally, high Adjusted Gross Revenue (AGR) dues cast a shadow on VIL's financial health.

The definition & calculation of AGR has been a subject of debate and litigation in India. The government's interpretation of AGR, which included non-core telecom revenue for some companies, led to disputes with telecom operators.

2019-2021: Mounting Debt and Government Intervention

The price war and high AGR dues continued to take a toll, leading VIL to accumulate significant debt. By 2020, struggling to pay the dues and interest, VIL's financial situation became precarious. The Supreme Court's 2019 verdict upholding the government's AGR definition further intensified the pressure.

In 2019, the telecom companies were ordered to pay a total of ₹1.5 lakh crore as part of their outstanding dues to the government. Among all telecom companies, Vi’s dues were the highest, ₹58,254 crore, apart from which Vi had other dues to pay.
Although non-telecom revenue was removed from the definition of AGR in 2021, the government did not waive dues. This led to a major collapse of Vodafone Idea's financials. 

2022-2023: A Lifeline from the Government

If VI collapsed, the Indian telecom market would be left with just two major players: Reliance Jio and Airtel. This would reduce competition and potentially lead to higher prices for consumers.

A three-player market fosters competition and innovation and keeps prices in check. The government aimed to maintain this balance by preventing VI's demise. They offered a debt relief scheme. Vi opted to convert a portion of its AGR dues, estimated at ₹16,133 crore, into government equity. This made the government the largest shareholder in VIL, with a 33% stake.

Recognising the potential for a telecom duopoly if Vi collapsed, the government intervened in February 2023. At present, the shareholding pattern of Vodafone Idea stands as such:

2023 Onwards: Charting a Course for Recovery

With some breathing room from the debt conversion, Vi focused on network improvement and explored ways to raise fresh capital. They aimed to secure up to $2 billion (over ₹16,000 crore) to support future endeavours.

2024: A FPO and Hope for the Future

In 2024, Vi took a significant step towards financial recovery. The board approved a plan to raise ₹45,000 crore through equity and debt issuance. This plan includes a follow-on public offer (FPO) targeting ₹18,000-20,000 crore. By attracting new investors, VIL hopes to solidify its financial footing and compete effectively in the Indian telecom market.

In this way, Vi has been hustling to stay onboard the harsh waters of the telecom sector. An impressive tale, right?

Fundamentals & Investor Insights

What was supposed to be a profit-making decision came back to bite both telecom companies. The government made a landmark decision in the AGR case just 1 year after the formation of the new entity.

One of the biggest challenges arose from the existing debt of both companies. Merging them combined their liabilities, creating a significant financial burden for Vi.

Vi was formed to provide fierce competition to the sector's new player, Reliance Jio. However, its debt caused difficulty in raising fresh funding, and the government's critical eye led to its near collapse.

This massively affected Vi's price chart. The stock, which was valued at over ₹100 at a time, came down as low as ₹5.8 in 2023. In March 2024, it is trailing somewhere near ₹13-14.

Not only that, but the Company Essentials of Vodafone Idea show that the total debt is over ₹2.01 lakh crore, which is a matter of major concern. Interestingly, Vi's enterprise value is over ₹2.65 lakh crore, much higher than its market capitalisation.

Although having high enterprise value could mean high debt, it also signals the company’s ability to generate strong cash flow.

Read about how Jio grabbed a significant market share of the telecom sector with its arrival from the article: Jio on its way up; right up to the top.

The Bottom Line

As we discussed above, Vodafone Idea's board approved a plan to raise up to ₹45,000 crore through a combination of equity and debt. This plan included acquiring ₹20,000 crore through equity issuance and instruments, potentially with an external investor joining in the next quarter.

Jefferies, SBI Caps, and Axis Capital have been appointed lead managers for the offering. It's important to note that none of these banks will underwrite the issue.

Previously, the record for the largest FPO in India was held by Yes Bank's ₹15,000 crore offering. Adani Enterprises attempted to surpass this record with a planned ₹20,000 crore FPO in January 2023. However, allegations of mismanagement by Hindenburg Research caused Adani to call off the offering.

And now, Vi is finally crossing the record with an FPO of over ₹18,000 crore. Does this mean that Vi could pay off its entire debt at once? No, that’s not possible.

But it could keep up with its payments and may also contribute a significant amount of the funds raised towards finally starting its 5G service. That was, after all, the major reason behind Vodafone and Idea's partnership.