‘Listen to your employees. Listen to your customers Shut... up. And do what they tell you.’
This was the mantra adopted by the maverick CEO of T-Mobile USA - John Legere, in delivering one of the most remarkable transformations of a company in corporate history. When he took the reigns of T-Mobile USA in 2012/13 it was a weak fourth player in USA with around 34 million wireless subscribers in an industry dominated by two giants – AT&T and Verizon with 78 and 98 million wireless subscribers respectively. The third player Sprint Nextel too had a wide lead over T-Mobile USA with 55 million subscribers.
The story from there is history though, and is ideal material for B-Schools case studies. Between 2013 and 2020 (period when John Legere served as CEO) T-Mobile US doubled its subscriber base from 34 to 68 million, while industry leaders AT&T’s mobile subscriber base grew by just 20 per cent. Worse was that of Verizon and third player Sprint, wherein the subscriber counts largely stagnated. Effectively over 70 per cent of industry subscriber net adds in the period went to one company - T Mobile USA. In April 2020 Sprint merged with T-Mobile USA.
With his simple but focused mantra, John Legere was able to understand what customers wanted and just gave it to them. He disrupted pricing and product strategies addressing the pain points of competitors’ customers. He brought in a culture of aggression right from the word go. Soon after he took over, he said AT&T’s network was ‘crap’, termed AT&T and Verizon as ‘Dumb and Dumber’. This aggression wasn’t one off. It was part of T-Mobile US culture. When Sprint CEO mocked T-Mobile, John Legere went a step further and asked him to stay in the ‘kiddie pool’ and away from big league in telecom. Thus his strategy of innovation in pricing and products combined with a culture of aggression and ruthless focus on customer service, propelled T-Mobile USA way ahead of peers.
Customers across the US consequently flocked to T-Mobile. Employees and shareholders of T-Mobile US benefitted as his strategy bore fruit, while AT&T, Verizon and Sprint’s performance and shares underwhelmed.
Takeaways for Vodafone Idea
So with this example, it is clear that weak telecom players can remarkably turn around. Now, can Vodafone Idea do the same? ‘YES’ and ‘NO’.
YES because Vodafone Idea has the basic ingredients in terms of industry expertise, brand reputation and recall to grow. But NO because it is near impossible under the weight of its current debt and investor expectations.
Elephant in the room
One big advantage that T-Mobile USA had to start dictating the terms of the industry was its very comfortable leverage position. In 2013, T-Mobile USA had a net debt to EBITDA of 4.7 times. Its balance sheet was strengthened with $4 billion in breakup fee it had received from AT&T a year prior (a proposed AT&T and T-Mobile US merger had been called off).
This gave the company a clean platform to be aggressive in its competitive tactics and create its own path that the industry leaders scrambled to follow.
Compared to this, Vodafone Idea has the worst leverage metric among large global telecom players at 13.4 times (see chart). To add to it, it is also the most expensive telecom player implying heightened investor expectations that appear unrealistic. Thus, there is an unsustainable disconnect here.
The telecom business is a cash guzzler requiring constant capex in terms of spectrum investments and equipment upgrades as industry keeps evolving to newer technologies for faster speeds. High leverage implies more challenges. Premium valuation for such businesses is bizarre, especially when growth is not differentiated versus better positioned peers
Recapitalisation – need of the hour
Today, Vodafone Idea unlike T-Mobile USA, can be anything but aggressive with its potential buried under a mountain of debt. So far, competitors have been dictating pricing and Vodafone Idea has, at best, followed suit a few days after. This does not inspire any confidence that it can get into a position to start dictating terms.
Most large global players have net debt to EBITDA below four times (China telcos have net cash), and yet find the going tough. Given this, expecting an aggressive fight from Vodafone Idea may border on believing the impossible. While the debt is owed to the government and it can negotiate terms of repayment to ensure operations continue, let it not be forgotten that interest on this debt keeps accruing every passing day.
Eventually it will have to be paid. This leverage and its consequences (company is unable to even submit simple bank guarantee for spectrum!), will continue to be a significant distraction into management time and effort. Meanwhile competitors keep getting stronger, widening the gap over Vodafone Idea.
Significant recapitalisation is the need of the hour for Vodafone Idea. Without net debt to EBITDA (ie EBITDA under normal circumstances) ratio being brought to at least below 5 times (preferably below 3 times), not much will change on the ground. This can be done by a combination of the government converting a large chunk of loans due from Vodafone into equity. This must be combined with promoters (and maybe external investors) standing by to invest or raise funds via FPO when required so that the company catches up with peers on requisite 4G/5G infrastructure as soon as possible, without increasing debt burden.
Preferably, the government should convert debt into non-voting or lower voting rights equity (at a suitable price) so that management is not constrained by politics of the day, which can happen if government voting right is significant. These actions will result in significant dilution of ownership for existing owners, but there aren’t many choices. It’s time everyone faces the facts.
Vodafone Idea’s time can come, and it may carve out its own history like T-Mobile USA sometime in the future, but only if stakeholders act decisively and make required compromises today. This is much required for the sake of the telecom sector in India and its customers.