Government approves debt-to-equity conversion; Vi rises 21%

Shares of Vodafone Idea soar as the government clears the conversion of debt owed on statutory debt-to-equity, making the government the largest shareholder of a 33% stake in the company.

Highlights

1. Vodafone Idea will convert Rs 16,133 crore ($2.2 billion) of debt into equity, with the government owning a 33% stake in the company.
2. The government’s approval of the debt-to-equity conversion imparts confidence in the company’s sustainability.
3. The stock rose 21% to trade at Rs 8.34 per share on the BSE but is still lower than the conversion price of Rs 10 per share.
4. The government’s holding will be classified as public shareholding and will not have any board seats in the company.
5. Despite the stock’s rise, CLSA(Credit Lyonnais Securities Asia) reiterates its sell rating on the stock and believes the company will still be in crisis unless its average revenue per user reaches Rs 300.

What is happening?

Shares of Vodafone Idea, India’s second-largest telecom operator, saw a significant rise of 21% on February 6th after the Indian government approved the conversion of the company’s interest on statutory debt into equity. The government will own a 33% stake in the company, becoming its largest shareholder, with the British Vodafone Group holding 31.7% and Aditya Birla Group holding 18.2%.

Impact

The debt-to-equity conversion, a financial manoeuvre that transforms debt into ownership, has given the company a much Aditya Birla Group-needed shot of stability. Yet, not everyone shares this sentiment, with some investors warning that unless the average revenue per user reaches a certain benchmark, the company may remain in peril. 

Despite a slight increase in stock value, it still falls below the conversion price and the government, now a public shareholder will have no influence on board decisions. Nevertheless, the government’s blessing of the conversion sends a hopeful message to both the company and the entire telecom industry, with rumours of further investments from the promoters swirling.

What’s Next?

Although Vodafone Idea still has considerable obstacles to overcome in its quest to obtain appropriate capital, the government’s new position as the company’s largest shareholder gives investors confidence in its future survival. Vodafone Idea must develop innovative ideas to remain competitive in a difficult industry, given that it has the lowest average revenue per customer among its competitors.

Sources: 

1. moneycontrol.com
2. businesstoday.in

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