Analysts question possible Adia bid for India telecoms group

Alamy via Reuters

• Stake in Vodafone Idea on offer
• India’s third-largest provider
• $29bn debt is an ‘uphill task’

Abu Dhabi’s top sovereign wealth fund, Abu Dhabi Investment Authority (Adia), is among the preferred bidders for a minority stake in Vodafone Idea, a struggling Indian telecom company.

However, analysts are warning that the deal makes little commercial or financial sense.

Vodafone Idea is India’s third largest mobile operator, but has lost about 210 million customers, nearly half its subscriber base, since its creation through the merger of Vodafone India and Idea Cellular in 2018. The company has never made an annual net profit and lost INR293 billion ($3.5 billion) in the last financial year.

---

---

Last year the Indian government became a shareholder in Vodafone Idea, after converting nearly $2 billion of company debt into shares.

Even with this respite Vodafone Idea still owes $28.6 billion. Most of this is owed to the government, meaning further debt-to-equity arrangements are probable, analysts say, which is likely to dilute existing shareholders further.

India’s government owns 23.2 percent of Vodafone Idea, while London-listed Vodafone Group holds 22.5 percent and Aditya Birla Group has 14.7 percent, after $2.2 billion of equity fundraising in April.

Nevertheless, Adia is among the preferred bidders for the Indian government’s stake, according to Indian media reports citing unidentified sources.

Adia declined to comment. 

“As a financial investment it probably wouldn’t make sense to buy into this company, but there may be other considerations such as the wider relationship between the UAE and India,” said Christopher Hoare, a principal at London’s New Street Research.

Adia has invested extensively in India, buying stakes in companies across multiple sectors including energy, real estate, retail and food manufacturing. The UAE’s former telecom monopoly e& (Etisalat) is Vodafone Group’s largest shareholder.

Adia’s apparent interest in Vodafone Idea would mark a surprise return to India’s telecom market for the UAE., after e& (Etisalat) lost more than $1 billion investing in an Indian mobile operator.

The unit, known as DB Etisalat, ceased operations in 2012 after it struggled to attract subscribers and became mired in regulatory problems.

Vodafone Idea’s shares ended at INR15.88 last week. The stock has fallen nearly 90 percent from its 2015 peak, but has rallied from a low of INR6 in April 2023. The company’s market capitalisation was $13 billion on August 16.

New Street Research has a price target of INR5 for Vodafone Idea. Mumbai’s IIFL Research’s target is more bullish at INR17, although analyst Balaji Subramanian offers a cautious outlook.

• Worst is over for Etisalat shares but don’t expect a rebound
• Telcos turning to tech to propel growth
• Adia among funds investing $60bn in Indian stocks

“Even if we project a very aggressive increase in the company’s revenue and ebitda [earnings before interest, tax, depreciation and amortisation], the stock price upside appears limited,” he said.

Rival Reliance Jio launched in 2016 with a 4G-only network, which puts it ahead of Vodafone and Idea, which largely rely on 2G and 3G networks.

Reliance Jio has 41 percent of India’s telecom subscribers, while Bharti Airtel has 33 percent. Vodafone Idea’s 218 million subscribers give it an 19 percent share.

Becoming financially sustainable “will be an uphill task” for Vodafone Idea, Subramanian said.

“If Vodafone Idea were to go bust, India would be left with just two major telecom operators,” he said. “This would apparently send negative signals to the global investment community and the perception of the ease of doing business in the country.”

According to Hoare’s calculations, Vodafone Idea generates a quarterly ebitda of just over INR 40 billion and incurs about INR 50 billion in interest and lease fees. 

To compete with its bigger rivals, he estimated that the company must spend up to INR 50 billion each quarter improving and expanding its network. It will also need to buy more radio spectrum.

“So, for shareholders to get anything out of this business, its quarterly ebitda must roughly triple,” Hoare said.

There is a moratorium on Vodafone Idea’s state debts until September 30, 2025. After that, it must repay $3.5 billion in the financial year ending March 31, 2026, and then $5 billion annually until the end of its 2031 financial year, Subramanian said.

“It’s likely the government will convert more of its debt into equity into the company,” he said.