Vodafone: India value extraction on the horizon?

Vodafone’s lock-up in India expires at the end of this month. Given the news today on a debt-for-equity swap involving the Indian Government at Vodafone Idea, we explore the implications of this and whether there could be a surprise value crystallisation for Vodafone on the cards.

Summary

Rarely has any telecoms deal had a more chequered history than Vodafone’s Indian adventure – but maybe we are within weeks of it effectively coming to an end. We believe that they “might” be able to extract up to 6p/ share of value from an asset that we – and we think all other analysts – have in their sum-of-parts valuations at zero.

In June last year, Vodafone started to reorganise what was left of its ring-fenced holdings in India, when they announced a partial sale of their holdings in Indus Towers. We wrote a note on this in June last year highlighting the potential paper value of their holdings in India at the time at €3.2bn.

Vodafone’s marked-to-market holdings from June last year after 1^st Indus placing

As of June last year, the share price of Vodafone Idea and Indus had rallied sharply and Vodafone took advantage of this rally to sell their stake in Indus, and this was used to pay off some of the loans collateralised against their Indian assets. They have also since sold down the rest of their Indus holding and swapped this into an increased stake in VIL to settle some outstanding VIL-Indus liabilities, which had increased their stake (before today) up to 24.4% in VIL.

We though have been sceptical for a long-time of the real underlying equity value for Vodafone Idea given the high leverage within the asset – and subsequently the share price had fallen back from INR17 last June to INR6.8 as of last night.

And then today, the Indian Government announced a debt-for-equity swap which effectively removes some of the liabilities within VIL in return for the Indian Government increasing their equity stake from 23% to 49%. My colleague, Chris Hoare, has explored this transaction in a lot more detail in his note out earlier today.

The stock market has reacted positively to this today with VIL up 20% to INR8.2/ share and hopes that over time, this “might” make the company a more viable and ongoing entity in future – even if we do think there is further debt restructuring that is still necessary.

As a result, the current position for Vodafone has been diluted down to 16.1% - but now on a larger equity base.

At current market prices, we see Vodafone’s stake in India being worth c.€1.6bn.

Vodafone’s position in India today

Technically, Vodafone does still have a contingent liability of up to €700m which expires in June this year. This would cover any payments that VIL might make during this time to cover any AGR fines, but given that the Indian Government has just written off debt owed to the Government and there is press commentary that they might be willing to rescind some AGR payments in future, we now think it is highly unlikely VIL makes any payments to cover this before June – the period during which Vodafone might be theoretically liable.

Therefore, this raises the question of whether Vodafone can monetise this stake and crystallise the €1.6bn holding – which would be worth 5.8p/ share at current prices.

Of Vodafone’s 17.8bn shares in VIL, 15.7bn, ie 88% of the total, have been locked up until 23 April this year, ie Vodafone will be free to try to sell them in 3 weeks’ time.

Vodafone then has a further 0.4bn shares which could be sold from 4 May this year, and then the final 1.7bn shares are only free to be sold from August 2026.

Vodafone’s lock-ups are expiring very soon

The block that comes free to sell from 23 April would represent 14% of the VIL share capital, so we think it is unlikely that a block of that size could necessarily be sold all in one tranche, but nonetheless, we would expect to see Vodafone consider a partial sell-down fairly soon and look to repatriate capital.

Even if Vodafone is able to sell the VIL position for cash, can Vodafone then actually repatriate the cash out of India to the UK? Vodafone and the Indian Government had been locked in a bitter legal dispute ever since 2007 on whether CGT (+interest) of c.€2bn was due on the initial purchase from Hutchison. The Indian Government did finally withdraw the case back in 2023, but we can’t rule out the scenario that if Vodafone were to find themselves sitting on a net cash position in India in future, the Government might make it difficult for Vodafone to extract this cash.

However, we feel that we are getting close to potential cash realisation for Vodafone and the upside optionality from this is not being effectively priced into Vodafone’s shares, especially as this would represent c.8% of Vodafone’s current group equity value, in the event they can crystallise it all at the current VIL market prices.