Vodafone pushes deeper into India with Essar $5bn buyout

 

Vodafone pushes deeper into India with Essar $5bn buyout - image - BDFM Online

The deal suits Vodafone as it brings an end to their highly fractious relationship, which had spilled over into the open in recent months.

KATE HOLTON and DEVIDUTTA TRIPATHY

Published: 2011/04/01 07:21:29 AM

VODAFONE is buying out its Indian partner, Essar, in a $5bn deal that ratchets up its exposure to a mobile market that has proved to be challenging despite its rapid growth.


Vodafone, which has faced a host of problems since entering the fiercely competitive Indian arena in 2007, will take over Essar’s 33% of Vodafone Essar, giving it direct ownership of 75% of the country’s third- biggest operator.


The remainder is owned by Vodafone’s Indian partners.


The move came after Essar exercised its put option. But the deal suits Vodafone as it brings an end to their highly fractious relationship, which had spilled over into the open in recent months.


It also highlights just how much money Vodafone, the world’s largest operator, has spent in Asia’s third- largest economy and the fastest growing mobile market in the world. Vodafone paid $11,1bn in 2007 for control of the carrier in what remains the largest foreign direct investment to be completed in India.


It valued the company at the time at $18,8bn including debt.


Since then, Vodafone has taken a charge of £2,3bn in May last year due to the fierce levels of competition and rising spectrum costs and is also engaged in a prolonged $2,5bn tax battle with the Indian authorities.


"It was expected," London-based Execution analyst Will Draper said.


"It tidies up the stake, gives Vodafone 100% control and it’s one less thing to worry about in India."


Analysts said the deal also made sense for Essar, one of India’s largest business houses with holdings from energy to steel, which can extract a good price from a tough sector.


"After taking control of the operations, Vodafone will become more aggressive in this market and will be better prepared for the next wave of opportunities," said Jagannadham Thunuguntla, head of research at SMC Global Securities.


"After all this dust settles over the sector, (market leader) Bharti and Vodafone will be the two stable players in India and will play a role in the sector consolidation."


Last year, carriers paid $23,8bn for 3G and broadband spectrum in India, far more than had been expected, with Vodafone Essar alone paying about $2,6bn in the auction.


Meanwhile, India’s cellular sector has been roiled by a scandal over the issuance of 2G licences and radio airwaves in 2007- 08 that a state auditor said caused revenue loss to the government of up to $39bn and has led to the arrest of the former telecoms minister, among others. Vodafone has not been implicated but the government has since proposed steep rises in the price of second- generation cellphone waves, which could cost Vodafone Essar heavily.


With 771-million mobile subscribers as of January, India is the world’s second-biggest market for mobile services and is adding about 19-million subscribers a month. But the carriers operate under wafer- thin margins in the crowded 15- player market. Reuters