Vodafone pushes deeper into India with Essar deal

Vodafone will buy out Indian partner Essar in a $5-billion deal that ratchets up its exposure to a mobile market that has proved 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 about after Essar exercised its put option. But the deal also 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 $11,1-billion 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 $18,8-billion, including debt.

Since then Vodafone has taken a charge of $3,7-billion due to the fierce levels of competition and escalating spectrum costs, and is engaged in a prolonged $2,5-billion tax battle with Indian authorities.

Breakingviews said that at current market prices the stake was probably worth no more than about $3-billion.

“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.”

More aggressive
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 … and will play a role in the sector consolidation.”

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

Meanwhile, India’s cellular sector has been roiled by an ongoing scandal over the issuance of 2G licences and radio airwaves in 2007-2008, which a state auditor said caused revenue loss to the government of up to $39-billion 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 mobile phone 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 growing at a stunning rate, adding around 19-million a month.

But the carriers operate under wafer thin margins in the crowded 15-player market after a vicious price war sent call prices tumbling in the second half of 2009.

Vodafone’s experience is often cited as a cautionary tale for foreign players and Vodafone chief executive Vittorio Colao has in the past described Indian telecom rules as nonsensical.

It will also have to act to avoid clashing with the authorities again as the deal will put Vodafone above the 74% limit that foreign companies can own in India.

A Vodafone spokesperson named the other owners within Vodafone Essar as IDFC and Indian businessman Analjit Singh. He said the group could also consider an IPO at a later date.

Vodafone, which is also in the process of selling minority assets it does not control, said its published net debt figure already included the $5-billion price. Its shares were down 1% on Thursday compared with a flat overall market. — Reuters

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Related stories

How US foreign policy under Donald Trump has affected Africa

Lesotho has been used as a microcosm in this article to reflect how the foreign policy has affected Africa

Is solar power the answer to Southern Africa’s energy crisis?

Africa’s favourable weather conditions means solar energy uptake could be accelerated with a few nudges in the right direction

Where do Africans study abroad?

China is becoming the preferred destination for countries such as Ghana and Nigeria

Khaya Sithole: Lessons to be learned from partitions

South Africa’s economic, racial and social divides invite unrest that will leave us all worse off

Extract: Trying to grasp something unfathomable

In ‘A Map to the Door of No Return’ Dionne Brand reads VS Naipaul as a sorrowfully spiteful narrator, full of the despair of exile

India and China border conflict intensifies

A frontier dispute between the two Asian giants turned deadly for the first time in 45 years. Observers argue the skirmish was exacerbated by Delhi’s annexation of Kashmir and Ladakh

Subscribers only

The shame of 40 000 missing education certificates

Graduates are being left in the lurch by a higher education department that is simply unable to deliver the crucial certificates proving their qualifications - in some cases dating back to 1992

The living nightmare of environmental activists who protest mine expansion

Last week Fikile Ntshangase was gunned down as activists fight mining company Tendele’s expansions. Community members tell the M&G about the ‘kill lists’ and the dread they live with every day

More top stories

Fifteen witnesses for vice-chancellor probe

Sefako Makgatho University vice-chancellor Professor Peter Mbati had interdicted parliament last month from continuing with the inquiry

Constitutional Court ruling on restructuring dispute is good for employers

A judgment from the apex court empowers employers to change their workers’ contracts — without consultation

Audi Q8: Perfectly cool

The Audi Q8 is designed to be the king in the elite SUV class. But is it a victim of its own success?

KZN officials cash in on ‘danger pay for Covid-19’

Leadership failures at Umdoni local municipality in KwaZulu-Natal have caused a ‘very unhappy’ ANC PEC to fire the mayor and chief whip

press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday