When Vodafone Plc., in 2007 acquired a majority stake in Hutchison Essar, its (Vodafone’s) Indian-born chief executive officer (CEO) Arun Sarin did not hide his exuberance after emerging as the winner against tough competition. “We have got it at a reasonable price. And I am confident that the business will make a major contribution to the Vodafone group over the coming years,” he said to the media.
Yet 12 years later, Sarin’s strategy to bring the company to the world’s fastest-growing markets has not only drained Vodafone’s financial resources but has not given any return to its shareholders.
In a meeting with the media on November 19th, in London, the UK company’s current CEO, Nick Read did not mince words and said the Indian joint venture (it merged Vodafone with Idea last year and has a 45 percent stake in it) was moving towards a “liquidation scenario” if the government did not give the company immediate financial relief.
The move comes on the heels of the Supreme Court handing down a judgment under which Vodafone Idea Ltd (VIL) has to fork out Rs 28,308 crore as adjusted gross revenue (spectrum usage charges will be extra), which is nearly equivalent to the EBIDTA (earnings before interest, tax, depreciation, and amortization) of all operating Telco’s together in FY19. (Vodafone Idea filed a petition with the Supreme Court (SC) to review its judgment that ordered telecom companies to pay over Rs 92,000 crore to the department of telecommunications (DoT) in penalties in a 14-year-long case. The matter pertained to the DoT claiming that telecom companies had under-reported their revenues.)
What went wrong for Vodafone?
Cut-throat competition, high spectrum costs and frequent flip-flops in government policies have made it difficult for Vodafone to make money in the country despite it being able to move from the fourth spot to the top in terms of subscribers (after the merger).
To add to the troubles, In September 2016, Reliance Jio entered the market, initially offering free service followed by rock-bottom tariffs (free voice for the first time) as well as cheap data powered by a brand new 4G network, which none of the rivals could match. It also backed it up by giving 4G feature phones, again at nominal prices, while competitors like VIL had no matching offer. The onslaught has continued, hitting VIL the most among incumbents as it has consistently lost both market as well as revenue share to its rivals, especially Jio.
How it affects India?
In the worst-case scenario, where the government doesn’t back down and Birla (who holds 26% stake in Vodafone Idea, out of which 11.6% is held by Grasim Industries Limited) refuses to fold his telecom cards, a rescue mounted by Grasim could cost it billions. The overhang of the Vodafone uncertainty is playing on investor psyche. Once the U.S.-China trade war stops making global textile markets jittery, fiber prices will firm. Grasim, in investors’ view, is better off spending billions on new capacities in fiber, chemicals, and cement than wasting any more money trying to salvage the telecom.
The Indian government should see the folly of effectively turning the telecom industry into a two-horse race between Reliance Jio Infocomm Ltd., controlled by Mukesh Ambani, the richest Indian, and Bharti Airtel Ltd., which, too, is staggering under a mountain of debt. As IIFL Securities put it, the bankruptcy of Vodafone Idea would hurt all stakeholders. Vodafone and Birla would lose control, the government would forgo $1.7 billion in annual spectrum revenue and banks would take losses on their $4 billion-plus exposure.
Such an outcome would cast serious doubt on the ability of private entrepreneurs to flourish, especially if they — like Birla, happen to find themselves in competition with Ambani in a tightly regulated industry. Future investors will think twice before investing in Indian markets.
To conclude, India should be worried about the idea of VIL being liquidated as it would not only have to forego approx. $1.7 billion in revenue, it would also weaken the already weak banking sector in India. Also, it would serve as a hindrance for all potential future investors; foreign or domestic in the telecom sector.