Vodafone Group Plc Chief Executive Officer Arun Sarin won a round this weekend in his battle to prove to skeptical investors that he can jumpstart the company’s sagging sales and earnings growth. Now he must prove he can win the war.
Vodafone’s $11.1 billion bid for control of Hutchison Essar Ltd., India’s fourth-largest wireless operator, gives Vodafone 16 % of a market that’s adding about 6.5 million users a month. It’s the latest move by Sarin to ease Vodafone’s dependence on European markets in favor of countries with surging demand.
The world’s biggest mobile-phone company now will be under pressure to turn Sarin’s expansion in these emerging-markets into sustainable profit growth. Newbury, England-based Vodafone will have to almost double its market share in India to 25 % by 2012 to justify the price it paid, says Bhuvnesh Singh, an analyst at Credit Suisse in Singapore.
“We all agree that there is massive growth potential in these markets,” says Jim Hyde, the managing director of Deutsche Telekom AG’s U.K. wireless unit. “How you turn that into a profitable business needs to be sorted.”
The $916 per subscriber that Sarin, an Indian-born US citizen, agreed to pay for control of Hutchison Essar is almost double the $500 a user he paid in May for Turkey’s Telsim Mobil Telekom.
Vodafone investors are giving Sarin the benefit of the doubt. The stock rose to a 17-month high yesterday.
“Sarin is now getting it right after a disastrous period,” says Alberto Espelosin, a strategist at Zaragoza, Spain-based Ibercaja Gestion, which manages the equivalent of $9.4 billion, including Vodafone shares.
‘Extracting a Return’
Vodafone beat out Reliance Communications Ltd. and Hinduja Group, both based in Mumbai, for the 67 % stake controlled by Hong Kong billionaire Li Ka-shing’s Hutchison Telecommunications International Ltd. It plans to make an offer for the remaining 33 % from Mumbai-based Essar Group. The deal values Hutchison Essar at $18.8 billion.
“Vodafone is a little too late to the emerging markets, and therefore has to pay a pretty heavy price,” says Alexander Izosimov, CEO of OAO VimpelCom, Russia’s second-largest mobile- phone company. “To start extracting a good return will be very, very difficult.”
Izosimov and Hyde talked to reporters at the mobile-phone industry’s annual 3GSM World Congress in Barcelona. Sarin speaks there today.
Turkey, South Africa
In the past year, Sarin, 52, has sold $15.8 billion of assets in the saturated Japanese and Swedish markets, shed minority stakes in Switzerland and Belgium and bought Telsim for $4.55 billion.
As a result of the Hutchison Essar deal, the proportion of Vodafone’s earnings before interest, tax, depreciation and amortization that come from the unit that includes emerging markets will rise to more than a third by 2012, Vodafone said in a statement. The figure is currently less than 20 %.
In addition to India and Turkey, the company has invested in Egypt and South Africa to counter slowing growth in markets such as Italy and Germany.
Vodafone shares have risen 26 % to 151.25 pence during the past 12 months, compared with a 15 % increase at Paris- based France Telecom SA, owner of the Orange network, and 1.7 % at Bonn-based Deutsche Telekom, owner of T-Mobile. In the previous one year period, Vodafone shares had fallen 14 %.
“If you look back at the last one and a half years, Vodafone has built confidence,” says Joris Franssen, a fund manager in Amsterdam at Kempen Capital Management, which oversees about $467 million, including Vodafone shares. “For years the company had spent a lot of money on purchases with low returns.”
In Gent’s Footsteps
Sarin graduated from the Indian Institute of Technology in Kharagpur in 1975 and received master’s degrees in business and engineering from the University of California at Berkeley. Married with two children, he earned 2.73 million pounds ($5.3 million) in salary and bonuses in fiscal 2006, Vodafone says.
Sarin became CEO in 2003, inheriting the $300 billion expansion engineered by predecessor Christopher Gent, including the $188 billion purchase of Germany’s Mannesmann AG.
In 2004, Sarin unsuccessfully bid for AT&T Wireless in the US, which was sold to Cingular Wireless LLC for $41 billion. Vodafone still owns 45 % of US-based Verizon Wireless. Sarin exited Japan after failing to increase profitability there.
Last May, Vodafone posted the largest loss in European corporate history, after writing down the value of its German assets. It had a net loss for the year through March 2006 of 21.9 billion pounds.
The Hutchison Essar acquisition is Sarin’s biggest.
“The deal makes a lot of strategic sense,” says Chris- Oliver Schickentanz, head of company research at Dresdner Bank AG in Frankfurt, which has a “buy” rating on the stock. “Far fewer Indians own a mobile phone compared to other countries, so we’ll see a repetition of the boom which happened in the US and Europe.”
Mobile-phone penetration in India is about 13 % compared with more than 100 % in Western Europe, says Bobby Leach, a spokesman for Vodafone.
India will be a challenge for Vodafone, says Shubham Majumder, an analyst at Macquarie Securities in Mumbai.
“Vodafone may have a much larger balance sheet and globally more mobile-phone subscribers, but largely they are a developed- market player, not an emerging market player,” Majumder says.