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Implications of settling vendor dues with equity for companies

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In Short:

Vodafone Idea board approved to give shares to vendors like Nokia and Ericsson worth Rs 2,458 crore to clear dues. Vi’s share price fell by 2.25%. ATC Telecom did a similar share conversion earlier. Vi aims to pay off debts and grow its subscriber base. Company faces challenges like dilution, valuation issues with this move. Telco still has Rs 2.1 lakh crore debt.

Vodafone Idea Board Approves Preferential Allotment to Nokia and Ericsson

In a significant move, Vodafone Idea’s board has approved the preferential allotment of equity shares to two of its key vendors, Nokia and Ericsson. This decision comes in a bid to repay their dues, with Nokia being issued 102.7 crore equity shares worth Rs 1,520 crore and Ericsson being issued 63.3 crore equity shares worth Rs 938 crore. The share price of Vi closed 2.25% lower at Rs 16.07 on Thursday.

Vendor ATC Telecom’s Influence

The stock market gains made by Vi’s vendor, ATC Telecom, seem to have prompted more vendors to opt for similar arrangements to clear their dues. Earlier, in March, ATC Telecom had converted convertible debentures into equity shares worth Rs 1,440 crore, which were later offloaded in April.

Implications and Considerations

This move by Vi is uncommon in the listed company space, as it is typically seen in startups or cash-strapped firms. However, there are several considerations to bear in mind, including dilution of promoter holding, equity risk for vendors, and scrutiny over related party transactions. Fair valuation and restructuring of shareholder relationships also play a crucial role in such arrangements.

Financial Outlook and Future Plans

Post the equity issuance, Vi’s promoters will hold a 37.3% stake, with the Government of India at 23.2%. The company recently rolled out a follow-on public offer and received an equity infusion from the Aditya Birla Group. With plans for capex and subscriber base growth, clearing pending vendor dues becomes essential for placing fresh orders.

For the March quarter, Vi reported a revenue of Rs 10,606 crore, an Ebitda margin of 41%, and a net loss of Rs 7,674 crore. The company’s total debt stands at Rs 4,040 crore owed to banks and financial institutions, with additional convertible debentures.

Future Investment and Debt Challenges

Vi is expected to incur a significant capex of Rs 50,000-55,000 crore over the next three years to expand 4G coverage, launch 5G services, and grow the enterprise business. According to Motilal Oswal Financial Services, the telco still faces a daunting debt burden of Rs 2.1 lakh crore, with annual instalments from FY26 onwards.

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