MUMBAI, Jan 6 (Reuters Breakingviews) – Every time Vodafone’s beleaguered Indian business appears to catch a financial break, it moves closer to actually snapping.
One year ago, Vodafone Idea (VODA.NS) told investors it was accepting a lifeline from the government: a debt-for-equity swap to remove roughly $2 billion of interest payments on mobile-phone spectrum and other charges over four years would hand New Delhi 36% of the financially stretched company. Investors cheered, and many customers in its now-234 million-and shrinking subscriber base breathed a sigh of relief. That lifeline never materialised, though, leaving the country’s third-largest operator caught in a game of financial chicken.
The swap was part of a reform package to support the sector and was supposed to help the company tap new investors for capital: The $3 billion Vodafone is heaving under $27 billion of net debt, an eye-watering 13 times its annualised EBITDA. The deal also gave other creditors confidence Vodafone might be able to pay its bills: one of those, $6 billion Indus Towers (INUS.NS), a telecom infrastructure company, accepted softer re-payment terms from its customer late last year. But the government now wants the company’s two largest shareholders – Britain’s Vodafone (VOD.L) and its tycoon partner Kumar Mangalam Birla of the Aditya Birla Group – to inject another $3 billion or so into the business. Vodafone, meanwhile, is now calling on the banks for fresh loans, per the Economic Times.
The country’s minister of communications, Ashwini Vaishnaw, said on Thursday that the conversion was a “complex issue” under discussion. The two owners infused more than $500 million last year after the debt rejig was announced. That may not have been sufficient, but there was no disclosure by the company stating that the swap was conditional on the existing owners’ financial commitment. Indeed, in 2021, Birla wrote a letter to the government warning that without official support the situation would drive its operations to “an irretrievable point of collapse”.
All sides come off looking bad, but it’s perhaps unsurprising. India’s politicians are careful to avoid situations where they might be accused of being too generous to foreign multinationals. Banks won’t want to lend more money to entities that look unviable. Without fresh funds, however, Vodafone won’t be able to invest in 5G at the pace required to keep up with Bharti Airtel (BRTI.NS) and Reliance Industries’ (RELI.NS) Jio, its profitable rivals. That will effectively condemn the company formed through a defensive merger in 2017 to a slow, painful decline, and the country to a telecom duopoly. State-owned banks would then have to shoulder the losses. With so much stress, though, other creditors might find a reason to pull the rug from under the company’s feet sooner.
There may be a case for testing the enthusiasm of Vodafone’s existing shareholders. But if India pushes too hard for them to yield, it may not be pleased with the result.
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Vodafone Idea will need a capital infusion, and converting its debt into equity is “a complex issue” which is under discussion, The Economic Times reported on Jan. 5, citing Ashwini Vaishnaw, India’s minister of communications.
It is unviable for the government to proceed with the conversion if the company’s top owners are unwilling to infuse enough capital into the business, the publication reported a day earlier citing a senior official.
Vodafone has called on lenders including State Bank of India, Punjab National Bank and HDFC Bank for loans worth more than 700 billion rupees ($847 million) so that it can pay Indus Towers, the Economic Times reported on Jan. 6 citing three people aware of the matter.
Editing by Antony Currie and Thomas Shum
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