It's hard to remember India being anything other than a nuisance for Vodafone Group Plc. The group has taken writedowns of 6.6 billion pounds ($8.3 billion) on the asset since buying it in 2007, and got itself tangled up in a long tax fight with the Indian government.
Lately it's been gored by Mukesh Ambani's Reliance Industries Ltd., whose mobile carrier Jio is literally giving away services and has quickly grabbed 70 million customers.
That Vodafone is in talks to combine its Indian business with Idea Cellular Ltd. is at least a sign that something can be done to cut the British company's exposure to the country. Vodafone is discussing an all-share deal with Idea that would see it de-consolidate the business in its accounts.
Combining the market number two Vodafone with third-placed Idea would create a new market leader ahead of Bharti Airtel Ltd, putting it in a better position to survive Ambani's onslaught. It would have about 390 million customers and about 40 percent market share by revenue before any antitrust concessions.
To try to make the numbers work in an all-share deal, the proposal excludes Vodafone's 42 percent share of an Indian towers company called Indus, worth about $4 billion. That brings the value of the Vodafone mobile business closer to Idea's market capitalization, which jumped more than 25 percent to $5.2 Billion on Monday (from $4.1 billion).
If a deal is finalized, Vodafone could then sell down its stake in the merged company over time, hopefully at a better price if it's better able to withstand the heat from Jio. There will be synergies too from combining operational and capital spending.
Plus Vodafone still has the option of selling its Indus shares to Bharti, which owns 42 percent of the joint venture, according to Bernstein's Dhananjay Mirchandani.
If Vodafone boss Vittorio Colao can engineer those twin moves in India, shareholders would probably accept a reasonable retreat from a painful situation. It would at least burnish the Italian CEO's reputation as a shrewd seller of Vodafone assets. Much of his nine-year tenure has been spent digging up the flags planted by his predecessors in countries from the U.S. to China.
And if the combined group manages to put up a decent fight against Ambani, Vodafone could hold on to the stake and its exposure to the fastest growing smartphone market in the world.
That said, India's been a poor investment for the European company. Its business there accounted for about 11 percent of revenue and 8 percent of Ebitda in fiscal 2016, but generated no cash flow. It's been a drag on Vodafone shares. Any sign of a potential escape is welcome.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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