Speculation is rife about U.S. tech giants grabbing stakes in Indian telcos after people familiar with the matter told the Financial Times that Alphabet GOOGL was seeking a 5% stake in the number two player Vodafone Idea.
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The market turned hyper competitive after Reliance Group’s Jio (which houses its digital assets) got into the space. Jio quickly grabbed the leading share by offering limited-period, super-fast, free data services and cheap calling that the legacy players struggled to match.
Users were moving en masse, putting the then leading players Bharti Airtel and Vodafone India in dire straits. That’s when Vodafone India combined with Aditya Birla Group to create Vodafone Idea, in which they had 44.39% and 27.18% stakes, respectively. The combination hasn’t fetched the desired results. However, this brought three main players to the forefront: Jio, Vodafone Idea and Airtel.
Data from the Telecom Regulatory Authority of India (TRAI) shows that Reliance Jio had the largest number of subscribers by Jan 2020, amounting to a 32.56% share, followed by Vodafone Idea with 28.45% share, Bharti Airtel with 28.38% and BSNL with 10.32%.
All the players are debt-laden. Moreover, they owe the Indian government billions of dollars after including non-telecom revenue in the calculations, as confirmed by the Supreme court in October last year. They’d rather shut down operations than pay the government dues. This again is a problem for the government, as it will make them default on their loans, thus transferring the problem to the banking sector.
The government had been considering some sort of a relief package for the telcos, including all or any of the following: a reduction in the licensing fee from 8% of adjusted gross revenues (AGR), a waiver of interest and penalties on past dues, a reduction in interest rates, a moratorium. Now, as part of the COVID stimulus, it has offered a two-year moratorium on yearly payments for the spectrum bought in auctions, provided they can bring bank guarantees and pay the interest accrued. However, any reconsideration of the Supreme Court’s order doesn’t appear to be on the horizon.
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Reliance has promised investors it will get rid of its debt by March and the company has been selling stakes to generate the necessary cash. After selling 9.9% to Facebook FB, 2.23% each to Vista Equity and KKR, 1.34% to General Atlantic and 1.15% to Silver Lake, it is already close to its target. It is now being rumored that Microsoft MSFT is in talks to buy a 2.5% stake for $2 billion. Additionally, Bloomberg reported that more cash will be raised in a U.S. IPO within the next 12 to 24 months.
Alphabet was also looking for a stake in Jio but that likely didn’t work out because Jio is already working with Microsoft, which offers Azure hosts its digital operations and Azure AI and Office 365 are used by the company’s SMB customers. So it likely didn’t make strategic sense for the company to include Alphabet. It doesn’t of course mean that there won’t be such a deal in the future.
As far as Vodafone is concerned, it needs to get rid of its debt, but it more urgently needs to pay government dues. It also needs a turnaround plan if it is to remain in business. If Google decides to buy a stake, it can get it cheap (a 5% stake could come for as little as $105 million). Moreover, the government could be willing to forego some of its dues if the rest was obtained quickly and/or there was a good chance of a turnaround.
With over 90% of Indian smartphones running on its Android software and its own set of cloud, AI and other tools, Google has what it takes to make a difference. Microsoft’s Azure and Amazon’s AMZN AWS are more strongly entrenched in the country, so this could be how G Suite gains some traction. None of the companies have rejected or confirmed the news.
Airtel has held up relatively better than Vodafone but it could also be shopping for all we know.
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At the heart of the buying is the amount of data each can gain control over, because that is what will drive ad revenue, ecommerce and the adoption of other kinds of technologies. With India being home to the second largest population in the world, where technology and technology-enabled consumption is growing by the day, taking steps to gain leverage makes sense.
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