The Vodafone-Idea merger
Written by Sundar Raghavan and Samir Shaikh, Member of SIGMA — The Business Club, NIT Trichy
Vodafone-idea, now known as Vi, is a name most of us have come across as the title sponsors of the IPL. With an attractive new outlook and a sleek UI for their app, Vodafone-Idea has definitely caught peoples’ attention. But behind all the cheerful ads we see on TV is a company that is knee-deep in a nasty AGR (Adjusted Gross Revenue) crisis.
It’s rewind time
Let’s take it from the top. A few years ago — Vodafone and Idea (owned by the Aditya Birla group) were the telecom industry’s top players. Their run till now had been highly successful, and both were entities that had a good stronghold in India’s telco industry.
In 2015, India was introduced to Reliance Jio. With aggressive and almost predatory pricing strategies, Jio very quickly became one of the largest players in the telco industry. This shook the industry and left giants like Airtel, Vodafone and Idea stunned. In 2016, Idea reported its first-ever quarterly loss in over a decade after Jio forced carriers to cut prices in an already highly competitive market. The situation worsened exponentially as Jio continued to proliferate. Fast forward to 2018 and Idea found itself reporting bigger and bigger losses for six straight quarters. For a company that already has a significant debt burden, being in the red for six straight quarters only worsened the situation.
In 2017, something started brewing. Vodafone and Idea came together and decided that they had to work together if they wanted to survive this saga. They decided to merge, and after over a year, a new company by the name of Vodafone-idea was born. There is a lot of debate as to whether it was the right decision to merge two companies with such different backgrounds and target audiences — Vodafone for the urban market and Idea for the rural market. There were obviously going to be positives and negatives to the merger.
The merger was expected to bring about a lot of positive changes to the company and the telco industry as a whole.
● First off, they would be the biggest player in the industry with a consumer base covering over 408 million Indians far larger than that of Jio and Airtel.
● Studies have found that the merged entity will help both companies save over 60% of their operational cost.
● Better network quality was expected
● In more good news for customers, tariff rates were expected to be slashed further as the company had to keep up with its competitor’s aggressive pricing strategies.
One of the many reasons people speculate that the merger will fail is that the merged entity will attempt to keep two brands alive; Vodafone for the urban market and Idea for the rural market. This may be an unwise decision to operate as one merged entity but keeping two different brand identities across the country. The downside of attempting to keep both the brands alive is additional costs (operating) being incurred while the primary goal of a merger is to achieve synergy and reduce these costs.
The merger took about a year to complete, and in August 2018, the merged entity named Vodafone-Idea was finally born. Unfortunately, things didn’t quite go as planned for the telco. The combined entity has been reporting massive losses one quarter after the other, spending 11 out of its 12 quarters yet in red. Its shares tanked by a whopping 81% since the merger bringing the share price down to as low as ₹ 2.95 in November 2019.
This colossal failure is mainly courtesy of the company’s massive debt owed to the government. The company has been in a long battle with the supreme court seeking relaxation of the repayment period as the sum is simply too huge for them to be paid even within a decade. Adding to this, the company hasn’t performed on the 4G front as well. This was due to their most fierce competitor Jio, which provided free calls with a bundled 4G data pack. Vodafone-Idea needs money to give users better service and requires users to earn money. However, its average revenue per user is the least compared to Airtel and Jio.
So, it’s pretty evident that large scale capital infusion is probably the only way the company can save itself. But one mustn’t forget that the company has been taking some promising steps to save cash and pay off their dues.
● They plan to sell the data centres and optic fibre business along with an 11% stake in the Indus Towers to raise money.
● Cash flow for the company has improved as they have increased the rates by up to 40%.
● 4G network expansion has been put on hold to save up cash
In September, Vodafone-Idea rebranded itself as Vi nearly two years after the merger.
“The new brand identity is a reflection of the two brands Vodafone and Idea coming together for the future which reflects the company Vodafone Idea limited being agile, strong and dynamic and in tune with the ever changing needs of the customers. It is created to help customers look forward, stay ahead, thrive and build a better tomorrow. Dynamic, vibrant and colourful the new brand is designed for the digital era,” Birla said.
This move is bold and promising as it is as though the company is making a statement that it is here to stay despite all the problems it is in right now. The company is also looking to invest in high-speed and secure lease lines (something that Vodafone has always stuck to), developing its network infrastructure, and improving cloud services.
The board recently approved a 25,000 Crore fundraising exercise that would seek to raise funds for the debt-ridden company from various sources such as equity shares, foreign currency bonds, warrants, convertible debentures (A convertible debenture is a type of long-term debt issued by a company that can be converted into shares of equity stock after a specified period. Usually, debts don’t have a way of adding to the company’s share capital, that’s what makes convertible debentures unique.), etc. The government’s chokehold on the company has also loosened up a bit after the Supreme Court ruled in favour of the telcos and gave them (Vodafone-Idea and Airtel) 10 years to pay their dues.
But Vodafone-Idea was actually looking for a much longer payment term of about at least 15–20 years, so the result was obviously disappointing, but nonetheless, the AGR issue has been debated upon for over a decade now, and it has always been a tug of war between the government and the telcos. So, one can expect the company to keep trying to get that period extended or even get the court to write off some of its dues. And this isn’t necessarily far-fetched because the Indian economy would take a massive hit if a giant of Vodafone-Idea’s stature goes down in an already declining economy. And it doesn’t look good when one of the country’s largest telcos goes out of business overnight. If this does happen, we can kiss goodbye to large foreign investments that would’ve otherwise been made in the rapidly growing telco industry. In the past, the government has spent more than 70,000 crores to bail out PSUs like BSNL and MTNL, so it isn’t unrealistic to expect it to do the same for an equally (if not more) well-established and successful company that has been around for decades. Thousands rely on Vodafone-Idea for jobs, and without it, the Indian telecom industry will be staring at a duopoly (comprising Jio and Airtel). Plus, it’s a private sector telco that they would be bailing out, and the reason this is important can be explained with an example. BSNL introduced 4G services in March 2020. Yes, you read that right 2020, almost 4 years after the private sector telcos introduced the same. Naturally, with quality of service and development of the industry as a whole in mind, it wouldn’t be a bad choice for the government to bail out the telco. The government itself is riding pretty low on cash due to obvious reasons, so it is keen to receive payments from these telcos as soon as possible. But considering we’ve already seen a pretty expensive bailout of Yes Bank by the RBI (in relatively recent times), it’s fair to expect that the government does have the power to revive Vodafone-Idea as well.
In the present scenario, Vodafone-Idea will require a major external capital infusion to pay such a large sum in such a short period of time. The entity has repeatedly stated that its survival depends on lenders and the Supreme Court’s lenience. If all goes well with the rebranding process and the execution of new fundraising plans, Vodafone-Idea will be able to escape their current premise if the right investors approach them in these trying times.