There's plenty of reason to cheer the Indian government becoming the top shareholder in Vodafone Idea, the country's third largest operator with 253 million subscribers. A debt-for-equity swap relating to $2.2 billion of interest payments on deferred mobile phone spectrum and other charges over four years is set to hand New Delhi 35.8% of the financially stretched company.
Britain's Vodafone ends up with 28.5%, and its local partner, Kumar Mangalam Birla's Aditya Birla Group, with 17.8%. That's not too bad for the two big backers, who had been reluctant to put in more capital given the ailing telecoms firm's $26.2 billion of net debt, a crippling 11 times its EBITDA. The surprise acceptance of the deal, part of a wider rescue package proposed by New Delhi in October, creates winners all round. It significantly increases the chances of Vodafone Idea's survival, sparing its lenders the threat of bad loans. That, in turn, cuts the chances of a duopoly of private sector operators dominating the giant emerging market.
It also reduces the risk of a repeat of the bruising price war that Mukesh Ambani's $220 billion Reliance Industries unleashed on the industry in 2016. Operators are only now raising tariffs back towards more sustainable levels. The tycoon is less likely to revert to such aggressive tactics if they directly hurt the government. Finally, the swap should make it easier for Vodafone Idea to secure outside investment. The company has held talks with international investors for months in an attempt to cut its debt pile. Would-be buyers can now take comfort in the government's firm commitment to a three-player market.
That's where Prime Minister Narendra Modi's newly earned reform credentials matter. The government has no desire to run the operator and is not even seeking a board seat, Vodafone Idea's management said on Wednesday.
Time will tell, but such assurances sound more reassuring now that New Delhi has committed to selling key state assets like Air India and is planning an initial public offering of the $200 billion Life Insurance Corp of India. Having the government on side, even if passively, might also help address other industry headaches ranging from high licence fees and taxes to exorbitant spectrum pricing and endless litigation. For now, Vodafone Idea's debt reset ticks all the boxes.