Indian government takes large stake in Vodafone Idea, giving it some breathing room

India's third-largest service provider, Vodafone Idea, this week opted to convert part of its spectrum and Adjusted Gross Revenue (AGR) dues into equity, allowing the Indian government to become the company's largest shareholder with a nearly 36% stake.

This ensures the long-term survival of the company and also that there are going to be three main private players in the country. However, concerns about its nationalization led to an almost 20% drop in Vodafone Idea's share price before it stabilized.

"In all of our interactions with the government, it has been very clearly stated that they do not want to run this company. They do not have the desire to take over the operations of the company. They want three private players in the market and certainly do not want a duopoly or monopoly," said Vodafone Idea Managing Director and CEO Ravinder Takkar, during a virtual press conference.

After the company opted for the four-year moratorium, it was expected that it would be able to find an investor. However, in the absence of any investor and with both Vodafone Group and Aditya Birla Group refusing to invest further in the company, Vodafone Idea had little option but to opt for the government's stake.

RELATED: Indian government throws a lifeline to Vodafone and other telcos

Even so, Vodafone Idea has been trying to find an investor for more than two years. During this time, its subscriber base has come down from 400 million to 270 million, and its average revenue per user (ARPU) has also dropped to INR 109 ($1.47), much lower than its peers, Jio and Bharti Airtel.

As per the last September 2021 results, Jio reported an ARPU of INR 144 ($1.93), and Bharti Airtel reported ARPU of INR 153 ($2.09).

RELATED: Jio struggles with average revenue per user

All this means that even if the long-term survival of the company is not in question, it needs to find investors quickly.

Changing landscape?

The current uncertainty may push some Vodafone Idea users to leave the network. Reliance Jio has been the key beneficiary of Vodafone Idea's subscribers in the past. This helped the company grow its subscriber base.

However, now that it is clear that there will not be any duopoly in India, Bharti Airtel and Jio are likely to focus on profitability and not on reducing rates to gain new subscribers. Right now, both Airtel and Jio are focusing on gaining an edge in the upcoming 5G market. Further, the competitive intensity has come down in India after the recent rate increase.

Vodafone Idea will re-emerge as a serious competitor to Airtel and Jio only when it is able to find significant investments to prevent the churn of its subscribers and to upgrade and modernize the network. It also needs funds to acquire the 5G spectrum since the 5G spectrum auction is scheduled later this year. 

RELATED: India's Airtel looks to deepen enterprise focus as 5G spectrum auction looms

Unless and until it is able to acquire funds, there is a danger that the company might have to cede more equity to the government for future payments of the dues. Further, the presence of the government as the largest stakeholder may dissuade prospective investors.

However, Vodafone Idea's management tried to reassure that the fundraising plan is on track. "I can confirm, very strongly, that there is a huge interest, especially from international investors, in investing in India. They're interested not only in India, but they also are interested in the telecom sector, and we've had interactions with several of them," said Takkar. He mentioned that the company might soon announce its fundraising plans.

The coming months will define Vodafone Idea's fate and the form it will eventually take. But, as of now, one can say that the year 2022 has not started on a promising note for the company.