Google-Vodafone Idea Deal Positive But Inadequate To Address Debt Woes: Analysts
The Google-Vodafone Idea deal, if materialises, will be a strategic positive for the cash-strapped telecom operator but may prove inadequate to solve the company’s debt issues, analysts said.
Alphabet Inc.’s Google is considering acquiring a stake in Vodafone Idea, the Financial Times reported on Thursday, joining Facebook Inc. in investing in the world’s fastest-growing mobile arena. Google may take a stake of about 5% in the company, though the deliberations are at a very early state, the FT report stated.
Vodafone Idea, however, said there’s no such proposal before the company’s board.
Google's investment in Vodafone Idea can be incrementally positive, but a 5% stake is unlikely to move the needle or provide any meaningful relief to the telco’s debt problems, Credit Suisse AG said in its latest note.
Acquisition of a controlling stake by an outsider or a sizeable equity infusion by current promoters remains the need of the hour, the note stated. "We think unless Google (or any other external investor) looks at acquiring a controlling stake in VIL, the chances of company's longer term survival beyond FY23 (when the moratorium on deferred spectrum debt ends) appear to be low.”
Goldman Sachs said that at Vodafone Idea's current market capitalisation, a 5% stake would be valued at $100 million, or less than 1% of the company's $14 billion outstanding net debt as of December 2019.
"However, we believe that any such investment from a global tech company such as Google could potentially make it easier for VIL to raise capital in the future...," it said.
The adjusted gross revenue situation still remains uncertain, and could potentially add as much as 50% to Vodafone Idea's existing net debt of $14 billion. In such a scenario, the telco's ability to generate investor interest is unclear, unless there is complete transparency on its regulatory liabilities, it said.
The existing high balance sheet leverage suggests Vodafone Idea would need at least $10 billion of incremental capital for net debt-to-Ebitda to fall to a level that is in line with global telecom peers, in the coming years, Goldman Sachs said. A strong balance sheet could help Vodafone Idea arrest its market share decline, potentially reducing overhang on tower stocks too.
On Friday, Vodafone Idea shares rose 12.71% to Rs 6.56 apiece on the BSE while the benchmark Sensex gained 0.69% to end the day at 32,424.10 points.