The Hindu Business Line : Vodafone calls again

Mr Arun Sarin, CEO, Vodafone plc (L), with Mr Sunil Bharti Mittal , Chairman, Bharti Tele-Ventures... Bringing a new strategic investor on board. — Rajeev Bhatt

SHAREHOLDERS of Bharti Tele-Ventures are sure to welcome the dramatic re-entry of Vodafone Plc, the world's largest mobile service provider into the Indian market with the latter's acquisition of a 10 per cent effective equity stake in the former.

Mr Arun Sarin, Chief Executive Officer, Vodafone, said, during a conference call, that the equity stake they were "acquiring today is the only stake available (in Bharti)".

Significance of the foray

Having exited the Indian market in 2003, Vodafone's come back is driven by strategic intent:

Through this 10 per cent equity stake, Vodafone is signalling to the telecom market that it will be a long-term, strategic investor in Bharti.

It is also saying that its intent to cobble together a series of deals with operators such as Idea Cellular, Spice Telecom, Aircel or even BPL (before the acquisition by Hutch) and build a pan-India presence are over.

It proposes to stay with Bharti and build on this strategic investment stake.

The deal confirms that Vodafone is willing to participate in the Indian growth story in mobile telephony, which is still at a nascent stage.

With the liberalised FDI (foreign direct investment) regime in place in India, there is scope for the company to build its equity stake in a phased manner.

Though Vodafone has a 3.3 per cent equity stake in China Mobile, it cannot afford to ignore a high-growth market such as India. After all, the Chinese market is reaching saturation, with a mobile subscriber base of 325 million as of March 2005 compared to the 60 million in India now.

Global experience suggests that in a rapidly consolidating mobile telephony market, it is the top three players who dominate.

Consolidation within the industry is likely to confer greater scale advantages and lower overheads for selling and administrative expenses, translating into higher operating margins.

Across Asia-Pacific, be it China, Indonesia, the Philippines, Thailand or Australia, operating margins average 40-60 per cent, considerably higher than the mid-30s for Bharti. The scope for enhancing margins is fairly significant among Indian players, especially if taxes come down as a proportion of revenues.

To top it all, across Asia, it is seen that the top player enjoys a significantly higher margin than the next two.

Aggressive pricing

No wonder, the valuation of this equity stake is pricey, going by the yardstick commonly applied to such deals.

To start with, Vodafone has paid a near-10 per cent premium on the market price to bag this 10 per cent equity stake for Rs 6,700 crore ($1.5 billion). Or, for that matter:

Consider the enterprise value (equity and debt) per subscriber, which is a popular metric for valuation in high-growth markets.

In this case, the subscriber base offers an indication of future cash flows.

Based on a mobile enterprise value of Rs 40,000 crore (accounting for 60 per cent of the total enterprise value at Rs 66,900 crore) applied on a subscriber base of 14.1 million, the enterprise value per subscriber works out to about Rs 28,000.

This is significantly higher than the Rs 17,000-9,000 per subscriber paid on an enterprise value of Rs 4,500-5,000 crore in the recent Hutch-BPL deal.

For that matter, this is even costlier than the aborted Aircel-AFK Sistema deal for acquisition of a 49 per cent stake at Rs 24,000 per subscriber.

Even from an EV/EBIDTA (enterprise value divided by earnings before interest, depreciation, tax and amortisation) basis, this deal is quite high-priced, at 15-16 times, and this is higher than most deals struck in the past couple of years, which have been at 6-10 times.

Finally, from an EV/Revenue standpoint, this deal, at six times, is also ahead of other recent telecom deals that have averaged five or less.

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