Date:13/02/2007 URL: http://www.thehindubusinessline.com/2007/02/13/stories/2007021303210400.htm

Back Pricing worth the entry into India

Krishnan Thiagarajan

THE VODAFONE LOGO

While Vodafone may be successful in winning a controlling interest of 67 per cent in Hutch Essar, will it end up paying a heavy price at an enterprise value (EV) of $ 18.8 billion?

There are two elements that need to be considered.

One, for Vodafone, which has lacked a cohesive emerging market strategy, Hutchison Essar will help fill a strategic gap by opening a gateway into the Indian market.

Since Vodafone was unable to achieve this objective through its 10 per cent effective equity stake acquired in Bharti in late 2005, this is probably the next best alternative.

Two, though the deal value is lower than the scary EV of $ 21 billion that was speculated earlier, it still works out to a stiff price. Based on the two key performance metrics - enterprise value/EBITDA (earnings before interest, tax, depreciation and amortisation) and EV/revenues, the consideration payable by Vodafone to Hutchison Essar is at a 20-30 per cent premium to the valuation of Bharti Airtel and Reliance Communications.

While this valuation builds in an element of control premium payable on such deals, Vodafone is banking heavily on effectively leveraging infrastructure-sharing arrangements (of the kind struck with Bharti for ILD and NLD today), value-added and innovative schemes, which are its forte worldwide and capitalise on 3G services over the next few years.

What is encouraging about this deal from Vodafone's point of view is that it meets the stated financial investment criteria committed to the shareholders.