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In a normal world, a merger and acquisition deal leads to re-rating of the entire sector as analysts and investors try to benchmark valuation of various companies to the valuation at which the deal has taken place. But this rule does not seem to work in telecom.
British telecom major Vodafone Plc sought Foreign Investment Promotion Board's (FIPB) nod to bring in Rs 10,141 crore to raise its 64% stake in its Indian subsidiary Vodafone India to 100%. This means that Vodafone India is valued at Rs 28,469.9 crore, according to a Business Standard report. Incidentally the company was valued at Rs 54,672.72 crore in February last year when the company placed some shares with Ajay Piramal controlled Piramal Enterprises.
In fact, Vodafone Plc itself values its Indian venture at a valuation between Rs 63,636 crore to Rs 75,454 crore. The company's own valuation of its subsidiary puts to rest the argument that Piramal bought shares from Essar at a high price.
What has led to valuations of the company dropping by nearly half in a span of 21 months?
This has happened at a time when the company has posted strong growth numbers and valuations of its peers have increased. During the same period ,valuation of Idea Cellular, a company which is a pure India play and best suited for comparison, has increased by 70%. Bharti Airtel, with its various operational issues in Africa has posted a 10% increase in its valuation. Even Vodafone Plc has seen its valuation increase by nearly 20% during the same period.
Idea trades at nearly 2.5 times its revenue while Bharti Airtel is trading at 1.75 its revenue. On the contrary,Vodafone Plc is increasing stake in its subsidiary at a valuation of 0.8 times its sales. Though sales multiples is not the right way of valuing a company, the figures give an idea of the huge differential between what the market valuations are and what the British company is willing to pay.
Being an unlisted company, Vodafone Plc can get away with charging a valuation it wants unless the companies who are selling their stakes have no objection to it. Piramals have no objection to the deal as they had a buyback clause inbuilt at the time of investment which gave them an assured return of 17-20% at the time of exit. They in short, are unaffected by the valuations at which the deal is taking place. Reports say that Piramal will be exiting their 11% stake for Rs 8,300 crore. This would give Vodafone a valuation of over Rs 75,000 crore, almost three times the valuation at which the others are selling their stake.
As for the other investors which include Max group's Analjit Singh, IDFC and other individual investors, their silence is astounding, given that they are selling shares at one-third the valuation at which Piramal's are selling. Though they are long term investors and the entry level valuation would have been low, the sharp fall within such a short time frame needs to be questioned, at least by a professionally managed and publicly listed company like IDFC.
One reason for the valuation drop could be that the company would be adjusting the disputed tax amount of Rs 11,000 crore. Adjusted for that,there is still a valuation gap of nearly Rs 15,000 crore as per the previous deal with Piramal group and over Rs 25,000 crore as per Vodafone Plc's balance sheet and Rs 35,000 crore as per Piramal's exit price. Had Vodafone India been a listed company, all investors would have got an exit at the same valuation as that of Piramal. There would be no room for excuses like tax disputes as all shareholders are treated at par in a listed entity.
Some analysts have attributed the fall to a lower penetration of 3G subscribers. But the difference is too huge and in any case, 3G is not yielding too much profit compared to the investment made. Vodafone had invested Rs 1,161.8 cr to acquire the 3G spectrum in nine circles.
One plausible explanation could be that other investors had a similar buyback arrangement with Vodafone when they made their investments. In such a case, this Vodafone deal has made a mockery of the FDI investment route as buyback arrangements with entry and exit pre-decided is quasi debt or preferential shares in nature. Opaque rules for unlisted companies will result in loss of foreign exchange to the country.
