Inside Vodafone's Beautiful Mind
A phone company disclosing a $7 billion equity investment in a country just as its government gets ready to sell expensive spectrum is one of those clever tricks John Nash would have approved of.
The math genius, whose work underpins solutions to competitive games like the one Vodafone is playing in India, might have guessed that the British company's latest move is also its dominant strategy -- what it should be doing regardless of its rivals' playbook.
Here's how that works: If the news that Vodafone has halved the debt burden of its India operation scares its more indebted competitors into submission, the company (which actually needs the airwaves more than any other large telco in India) gets to buy them without spending an arm and a leg in the $83 billion auction that starts Sept. 29.
And if the announcement brings out the warrior spirit in Indian billionaires, there'll be an irrational bidding war. Shares of Sunil Bharti Mittal's Bharti Airtel and Kumar Mangalam Birla's Idea Cellular were southbound even before oil tycoon Mukesh Ambani this month began offering free voice calls on his new 4G network. The publicly traded pair, as well as Reliance Communications, controlled by Ambani's younger brother Anil, could bleed if they try to stop Vodafone from securing spectrum.
The real winners of this feud won't be in the industry. Finance Minister Arun Jaitley would be delighted if what analysts were predicting to be a flop show turns out to be a contest. A bonanza from spectrum would vindicate investors in Indian government bonds, which have rallied hard this year.
With no end in sight to its long-running $2 billion tax dispute with New Delhi, Vodafone, which has delayed the IPO of its India business, would have a better story to sell if it went to investors looking rich in spectrum and light on debt. That's one more way the equity infusion -- the biggest foreign investment in India in rupee terms -- takes on the appearance of a hand the company had to play.
The payoffs are still uncertain, however. According to Bloomberg's proprietary default-risk monitor, Reliance Industries, whose oil-refining margins back capital expenditure by its Jio mobile unit, has a lower one-year risk of default than Vodafone 1 . The elder Ambani could slash Jio's introductory prices further, forcing losses on everybody.
And although Ambani, too, needs to fix his abysmal record of shareholder returns -- in nine years, investors have earned 1.3 percent in rupees (or a 40 percent loss in dollars) by owning Reliance -- dominance of India's telecom market would give him more cachet than, say, sharing the No. 2 spot with Vodafone.
The ingredients are in place for everybody to lose their heads come Thursday. It's possible that instead of Nash, the real inspiration for Vodafone's equity infusion was Paul Simon's Mrs. Robinson: "Every way you look at this you lose." Here's to you, Vodafone, if you lose the least of them all.
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