Hutch Deal: Vodafone bid reinforces focus on new mkts

British telecom major Vodafone has reinforced its strategy to switch over to developing markets from developed ones by giving its chief executive Arun Sarin the go-ahead to pursue a cash offer for the country's fourth largest mobile operator Hutchison Essar.

Investment bankers and corporate observers said a couple of factors, including its falling average return on per user in Europe and inability to grab the majority stake in the country's largest telecom player Bharti Airtel, forced it to take this decision.

In a report, JP Morgan said Vodafone needed to raise exposure to high-growth  emerging markets and offset prospective fall in EBITDA in Europe.

Analysts said the foreign company would utilise funds it raised through selling minority interests in Belgian and Swiss operators for the Hutchison Essar deal. It purchased the Turkish operator Telsim at the beginning of the year and recently upped its stake in its Egyptian subsidiary.

"The board of Vodafone continues to believe the mobile market in India has great potential and is therefore considering the acquisition of a controlling interest in Hutch Essar, " Vodafone said in a statement.

India is the world's fastest growing mobile telephone market with nearly six million new users signing up every month. However, nearly 136 million Indians who use mobile phones represent only one-fifth of total population, indicating potential for massive growth for telecom companies.

However, Vodafone's cost of acquisition of Hutchison Essar might go up, depending upon the penalty it might have to fork out to get out of Bharti Airtel before a year. It is trying to waiver from non-competition clause with Bharti Airtel, in which it picked up a 10% stake for $2.74 billion last year, for a penalty. Also, it will have to offload its stake in Bharti in order to get into Hutchison Essar.

The JP Morgan report said the lack of synergies and political relationships would force Vodafone to pay a higher price, especially if it would lock in to a bidding war with Reliance Communications. In that case, the Vodafone shareholders might not see material cash returns in the foreseeable future, the report added. Analysts said the move to switch out of Bharti to Hutchison Essar evoked memories of Vodafone's abortive attempt to switch US assets two years ago.

Vodafone tried to switch out of Verizon Wireless, in which it had 44 per cent stake, in order to acquire the struggling AT&T Wireless, the fourth-largest US player. Cingular Wireless outbid Vodafone by paying $38 billion and it strained relations with Vodafone's existing US partner Verizon.

However, the advantage of Vodafone could be its CEO who knows the country and has the capability to tilt the deal in his favour, analysts said. Sarin was born and brought up in the country and graduated in engineering from the Indian Institute of Technology at Kharagpur in West Bengal.