Goldman Sachs – Vodafone changes tack, looks to borrow funds
Vodafone Idea Ltd has shelved its plan to raise ₹25,000 crore by selling hybrid securities to foreign funds and is now looking at borrowing funds, potentially with promoter guarantees, to refinance its debt, said two people directly aware of the matter.
The company also plans to overhaul its existing operations in some telecom circles to save fixed costs, the people cited above said seeking anonymity.
“The company is in talks with lenders to raise close to ₹10,000 crore by issuing papers such as non-convertible debentures,” said one of the two people, adding that the decision to delay the original fundraising plan is primarily due to the prevailing low share price of Vodafone Idea, and also due to a difference of opinion with investors over the valuation of the company.
Vodafone Idea has been the worst hit by a 2019 court order that directed telcos to pay the government billions of dollars in dues.
Although the Supreme Court later allowed the operators to stagger the payments over 10 years, Vodafone Idea still has to pay back the government more than ₹ 50,400 crore.
The adverse order and a bruising price war triggered by the entry of Reliance Jio Infocomm Ltd in 2016 has left the company’s financials in shambles.
“Promoters Aditya Birla Group and UK’s Vodafone Group Plc believe that the business environment is set to improve considerably for the company, enhancing shareholder value,” said the first person cited above. “They believe equity dilution at the current market price does not do justice to the intrinsic value of the business.”
Emails seeking responses from Aditya Birla Group and Vodafone Group remained unanswered. Responding to queries, a spokesperson for Vodafone Idea denied any change in its fundraising plan. “This is absolutely untrue,” the spokesperson said.
Vodafone Idea has been in talks to raise ₹25,000 crore through sales of equity and hybrid securities to a consortium of potential investors since August last year.
Late last month, US-based GoldenTree Asset Management left the consortium led by Oak Hill Advisors, which has been aiming to raise around ₹15,000 crore via hybrid securities for Vodafone Idea. The other members in the consortium, including Pacific Investment Management Co, Sixth Street, Twin Point Capital and Varde Partners, continue to be part of the group.
However, differences between Vodafone and the investors have prompted the telco to seek a faster route to raise money. In February, Vodafone said the proceeds of the fundraising will be used to boost the company’s 4G coverage in 16 priority circles, which contribute to 94% of the telco’s revenues.
To save costs, Vodafone is planning to restructure operations in some circles in tier-II and tier-III locations while increasing its focus on the top-nine telecom circles, including the four metros of Mumbai, New Delhi, Kolkata and Chennai.
“Vodafone will be increasing its focus on premium 5G-ready customers located in nine top telecom circles. This will help Vodafone improve its average revenue per user (Arpu) and cash flows quickly. Vodafone may increase the subscription costs for customers as well,” said the second person.
Due to the planned overhaul of operations and the ongoing integration with Idea, there could be a possible reshuffle in teams and rationalization of Vodafone-Idea’s workforce, according to the second person.
“By implementing the latest strategy, Vodafone should be able to save at least ₹700 crore in FY2022, which could be used to refinance the company’s dues,” said the second person.
“Vodafone could save ₹5,800 crore in cash flows annually if adjusted gross revenue liability were lowered to its self-assessed value. However, even at the lower assessed amount, the company would remain FCF (free cash flow) negative, and Arpus would need to be at 1.7X of current levels for Vodafone Idea to be FCF neutral,” said a 12 January Goldman Sachs report.
Vodafone has moved the Supreme Court seeking modification of the order on its dues.