By Santosh Menon and Tony Munroe (Reuters)
BARCELONA/HONG KONG: Vodafone shares climbed to a 15-month high on 13 February after it beat rival suitors with an $11.1 billion, or Rs 48,540 crore, bid for a controlling stake in Hutchison Essar, India’s fourth-biggest mobile phone firm.
The deal, announced on 12 February, gives Vodafone a powerful stake in the world’s fastest-growing mobile phone market which will help offset slowing growth in its core European operations.
But is also a high-stakes move from the world’s biggest mobile phone operator by subscribers outside China, which has been accused by some investors of overpaying for acquisitions.
At 1000 GMT Vodafone shares were up 2.5% at 153 pence, the biggest rise on the UK’s benchmark FTSE-100 index, suggesting the firm had struck the right balance.
“Although near term multiples look high, the growth potential is there to create real value for Vodafone shareholders if they can leverage their brand and operating skills in a very exciting end market,” said Wesley McCoy, investment analyst, UK equities, at Standard Life Investments, which has a 1.7% holding in Vodafone.
Standard Life has been a critic of Vodafone Chief Executive Arun Sarin in the past and was among a minority of investors that voted against his reappointment last year.
The purchase of Hutchison Telecommunications’ 67% stake in Hutchison Essar values the Indian firm at $18.8 billion, including debt.
“This begins to answer our key bear issue with Vodafone - the lack of emerging market exposure,” Investec Securities analysts wrote in a research note.
Vodafone said the deal meant about a third of its profits would come from emerging markets by 2012, compared with less than 20% currently.
“This acquisition is in the largest high-growth market in the world, where it is possible for us to acquire control,” Sarin told analysts on a conference call.
He said only about 13% of India’s population of 1.1 billion had a mobile phone, compared with about 40% in China and penetration rates of 100% in parts of Europe.
But, analysts also said Vodafone was paying a high price, and some were sceptical of its growth forecasts.
“Vodafone has agreed to pay nothing less than top dollar,” WestLB analysts wrote in a research note. “There is no doubting the potential of the Indian market, but we fear that Vodafone has paid up for too much of this potential.”
HUTCHISON HITS JACKPOT
The deal is Vodafone’s third-biggest ever and it beat three rival suitors for the stake, India’s Reliance Communications and the Hinduja and Essar groups, the last of which owns 33% of Hutchison Essar.
Shares in Hong Kong billionaire Li Ka-shing’s Hutchison Telecommunications, which had risen 28% since November in anticipation of a sale, were suspended on 13 February. The company was expected to make a statement later. The deal marks another lucrative exit for Li, whose dealmaking is legendary.
“They hit the jackpot again,” said Francis Lun, general manager at Fulbright Securities in Hong Kong. “Considering that they only put HK$20 billion (US$2.6 billion) into India, it has to be a good deal for them.”
Shares in Hutchison Telecom’s parent, ports-to-property conglomerate Hutchison Whampoa Ltd., rose 0.7% and its bond spreads tightened on hopes that deal proceeds will be used to lower debt and improve its credit profile.