New Delhi: Vodafone Group will have to write off $3 billion (Rs13,200 crore) to $3.5 billion (Rs15,400 crore) in intangible costs over the next five years as it seeks to replaces the ‘Hutch’ brand, among other assets, at its latest acquisition, Hutchison Essar.
“Obviously, there will be a goodwill amortization,” said Arun Sarin, Vodafone chief executive, in an interview with Mint. The world’s largest mobile phone company, Vodafone likes to use its own brand in markets where it has bought rival phone companies.
“We expect the amortization of the intangible assets to be around £300 million to £400 million per year initially, and will fall to around £250 million to £350 million towards the end of the five-year period,” Paul Donovan, CEO for emerging markets for Vodafone and a key member of Sarin’s India acquisition team, told Mint.
While the amounts are large, Vodafone, which has been a prolific buyer of other companies and their brands, is used to it. The Newbury, England-based company, took a multi-year, multi-billion impairment charge on its Mannesmann AG takeover in 2000, which cost it $231 billion. Typically a company will review the value of its intangible assets when it has acquired a company, its brands and licences. It will then write down the value of these assets if they are perceived to be worth less than the acquisition price.
Commenting on a pending infrastucture-sharing with Bharti Airtel, India’s No. 1 mobile operator, which has become a bone of contention with Hutchison Essar’s local partner, the Essar Group, Sarin said: “It is only an intent and not a contract. If you ask me, it is much ado about nothing.” (See related story on Page 3)
Vodafone acquired a 67% stake in Hutchison Essar for $11.1 billion, a deal which, Sarin said, is expected to close by April this year. The transaction is the biggest takeover in India to date.
Sarin said his company, which owns a tiny 3.25% stake in China Mobile, sees a big opportunity for growth in mobile phone services in Asia.
“India is 13% penetrated, China is 40% penetrated. While India goes from 13% to 40%, China is going from 40% to 60% or 70%. There’s a lot of headroom here in terms of growth,” said Sarin, a 52-year-old US citizen of Indian origin.
Vodafone expects to spend $2 billion to expand its network in India in fiscal 2008, up from the $1.2 billion that Hutchison Essar is spending this year, and will focus on expanding the firm’s footprint, Sarin said. Hutchison Essar is India’s fourth-largest cellular operator by subscribers.
“It’s about network rollout, getting to more and more rural parts more quickly,” said Sarin. “The more you give people the opportunity to talk, the more they will talk; if you don’t, they won’t talk.”
Sarin, who grew up in Bangalore, is an engineer from IIT, Kharagpur. Vodafone, which has over 200 million customers worldwide, will use its supplier relationships with phone manufactureres to get low-priced mobile phones into India, Sarin said. The Hutchison Essar acquisition will add over 24 million Indian customers to the Vodafone global network.
“Eventually, they will go for the same brand everywhere, though they are likely to use a dual-brand like Hutch-Vodafone until they are sure the service is up to their global standards,” says Damien Chew, European telecoms analyst for ING Equity Markets at London. “A single, well-recognized global brand is a big asset when it comes to advertising and promotions, in turn helping them maintaining brand loyalty.”
Vodafone also said India is likely to become its largest market by customers in a year, overtaking Germany where it has around 30 million users now. “We are adding one million subscribers every month here and should hit the 35 million in one year,” Sarin said at a press conference. The company had taken three months to add its last one milliion users in Germany.