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Thursday, January 18, 2007
Santosh Menon
LONDON: Damned if he does, damned if he doesn't.
Vodafone CEO Arun Sarin is walking a tightrope as the British mobile phone giant gears up for a multi-billion dollar bid battle for Indian mobile operator Hutchison Essar.
While investors, long concerned about slowing growth in Vodafone's core European markets, support Sarin's strategy to increase Vodafone's exposure to India to capture its sizzling mobile market growth, they don't want him to pay over the top for India's fourth-biggest mobile company.
Analysts say Sarin, who faced a rough ride from investors for much of last year for the company's slowing growth and saw around 10 per cent of Vodafone's shareholders vote against his reappointment last July, faces testing times.
If Vodafone loses the battle, it could lose out on what could be the biggest mobile growth opportunity in a long time. If it wins the asset but pays too much, Sarin's attempt to build a reputation for prudence in deal-making could be in tatters and he could face criticism from investors.
Nearly four weeks into the bidding action, the steadily rising price tag for the asset in the world's fastest growing mobile market is causing some heartburn among investors.
"In terms of valuation, we still fail to understand how a deal on Hutch Essar ... can create value for Vodafone," said Exane BNP Paribas analyst Antoine Pradayrol.
Vodafone is being challenged by India's Reliance Communications, the Hinduja group and Hutchison's minority partner in the venture, Indian group Essar, in the race for Hutchison Essar.
Valuation estimates for Hutchison Essar, where a 67 per cent controlling stake owned by Hong Kong conglomerate Hutchison Whampoa is on offer, have climbed up to as much as $20 billion from around $13.5 billion as the list of suitors expands.
One investor - State Street - has already called upon Vodafone to abandon the pursuit, saying it risked overpaying.
BLANK CHEQUE
"I don't think they have a blank cheque (from investors)," said Richard Marwood, fund manager at AXA, adding that Vodafone would have to adhere to strict internal acquisition criteria it made public last May.
The company, which has been behind the biggest takeover deal in history when it bought Germany's Mannesmann for $180 billion euros seven years ago, has historically been accused by some investors of paying over the top for acquisitions.
It was forced to take major writedowns to the goodwill value of its assets last year, and reported a 21.8 billion-pound loss last May, the biggest in European corporate history.
For now, the market is betting Sarin will be cautious in pursuing the Indian deal, likely to be Vodafone's biggest since the Mannesmann acquisition.
Vodafone's share price - which closed at 149 pence on Wednesday - is higher than levels it traded when it first confirmed its interest in Hutchison Essar last month.
TEMPTATIONS
Sarin, who is sparing no efforts to win control of Hutchison Essar, visited India, the country of his birth, last week meeting ministers to drum up support for his company's bid.
Winning control of Hutchison Essar will give Vodafone a strong asset and 22 million customers in a fast growing market where headroom for growth remains abundant.
India's main mobile operators now share nearly 150 million customers, but with India's population over 1.1 billion, it translates to less than 2 out of 100 people owning a mobile.
For Vodafone, which faces slowing growth in its key Western European markets, a strong presence in India could provide it with a vital growth engine.
It owns a 10 per cent stake in India's top mobile company Bharti Airtel, but does not stand a chance of getting control as Bharti's main shareholders don't want to sell.
While Hutchison Essar may be available, it is by no means cheap. Analysts say at $17-$20 billion, its enterprise value is some 20 to 24 times EBITDA (earnings before interest, tax, depreciation and amortisation) for the year to March 2008, well ahead of Vodafone and all its Indian peers.
"Our own DCF (discounted cash flow) valuation of Hutch Essar is $15-16 billion ... and we believe that above these levels, Vodafone will struggle to prove that the acquisition meets its financial criteria for acquisitions," said Exane BNP Paribas' Antoine Pradayrol.
Source: Reuters
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