Deutsche Bank: Merge Vodafone Idea with BSNL to Save both Telcos

Deutsche Bank has said that the Indian government must take control of the ailing Vodafone Idea by merging it with BSNL. The Bank said that the government should do this to save the telco going bankrupt.

A Vodafone Idea-BSNL Merger?

Vodafone Idea's survival has come under serious scrutiny especially after the Supreme Court ruled out any relief on its huge AGR dues. In a note, Deutsche Bank said, "…the only viable solution is for the government to recapitalise Vi by converting its debt into equity, preferably while merging it with BSNL, and then providing it a clear commercial mandate based on profitability targets and incentives".

Vi's shares closed 0.8% down at ₹8.29 on Monday on the BSE, giving it a market cap of ₹23,821.64 crore. As such, the bank commented, "should this happen, Vi’s shareholders would be heavily diluted as government debt is roughly six times the (telco’s) current market-cap, and such a solution might be an acceptable outcome to shareholders, with a $20 billion enterprise value feasible and non-dilutive".

The Bank also pointed to the government's "talk" to have three private players. It said that "there has been insufficient action to take that claim very seriously".

Deutsche Bank said the ball is in the government’s hands. It said that India's long history of draining the telecom sector has "left a legacy of repeated business failures, including the largest bankruptcy in Indian corporate history, Reliance Communications, and this is likely to be trumped by Vi".

The bank said that the government "needs to make a call". The bank said that the government can either take control of Vi or arrange for a duopoly; the alternative appears to be bankruptcy, as private investors are extremely unlikely to save the company.

Vodafone Idea Crucial for Indian Telecom Sector

Right now, the telco has to pay the DoT over ₹1.5 lakh crore in AGR dues and spectrum payments. The telco has a net debt of ₹1.8 lakh crore and a cash balance of ₹350 crore in March quarter. These are worrying numbers, as the telco has been looking to raise cash since September.

IIFL Securities said, "there is a slim chance that the government could salvage this, especially as it stands to lose if Vi were to end up in NCLT".

Kotak said that right now, Vi's cash flow are set to fall by at least $3.1 billion in FY 2023. This takes into account the AGR instalment of ₹9,000 crore, spectrum payments of ₹15,900 crore, a ₹2,500 crore interest on the non-government borrowings and low run-rate of capital expenditure at ₹6,200 crore.

Analysts say that for Vi to survive, there are several things that need to happen. First, it needs a further moratorium from the government on spectrum payments. Second, a coordinated tariff hike in the industry supported by floor pricing. Third, a significant reduction in licence fees and spectrum usage charges to improve operating economics of the telecom sector.

However, the telecom sector has not received any relief from the Supreme Court. Last Friday, Supreme Court trashed the petitions filed by Vi, Bharti Airtel and Tata Teleservices seeking AGR dues recalculation. This means that Vi has AGR dues worth ₹58,254 crore, of which it has paid ₹7,854 crore.