The government is against the merger of ailing Vodafone Idea with state-owned BSNL and MTNL, sources said. The stand comes weeks after industrialist Kumar Mangalam Birla had said that he is “willing to hand over” his 27% stake in the crippled telco to “any entity - public sector/government /domestic financial entity” in the name of “national interest”.
Government sources said “multiple and strong logical reasons” suggest “outright rejection” of any proposal that gets the debt-laden and loss-making private entity within the fold of the state-owned companies, which themselves have a poor track record of managing their business and are operational mainly on the back of recurrent government bailouts. “How can we even allow this. It’s almost like having privatisation of profits, and nationalisation of losses?” a senior officer said.
Birla’s call appeared to be in line with a suggestion made in a report of Deutsche Bank. “…the only viable solution is for the government to recapitalise Vodafone Idea 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,” it had said in the recent note.
Cultural difference will make merger a sure failure
Deutsche Bank added that “should this happen, Vodafone Idea’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.” The numbers are, however, stacked against such suggestions. Vodafone Idea, the third-largest telecom operator with around 270 million subscribers, is under heavy debt, owing £9.63 billion to the government in deferred spectrum payments, while being liable for another £6.1 billion towards AGR liabilities.
The liabilities come with interest burden of billions, with the company having another £2.3 billion bank debt. Its losses in the previous two quarters have been in excess of £700 million. On the other hand, BSNL and MTNL had to be handed out a £6.9 billion revival package around 2019 to keep them afloat, and are still struggling to attain profitability. As per a reply of minister of state for communications Devusinh Chauhan in Rajya Sabha, total liabilities of BSNL stood at £8.12 billion while MTNL’s at £2.93 billion.
“It will be a financial mess if all the struggling entities are brought together and merged. What purpose does it serve? In fact, if their operations are brought together, it may turn into an even-bigger financial drain on the exchequer in the coming years if the operations do not turn around,” an officer said. “In any case, instead of being so considerate for an inefficient private entity, the government may simply focus more on the BSNL/MTNL combine and give them more funds to make them competitive and turn them around.” Niti Aayog, which has been roped into the issue by the telecom department, is also against the proposal. The government think-tank feels that any such measure may also see an “erosion in value” of Vodafone Idea, and thus not much may be left in the deal for BSNL-MTNL to gain from.