Early this year, the world’s leading telecom operator, Vodafone, had stated that it was looking to tap growth markets in Asia, France and Poland. Last month, it acted on that intention, buying a 10 per cent stake for Rs 67 billion ($1.5 billion) in India’s largest mobile operator, Bharti, with 15 million subscribers and $2 billion in annual revenues.
Billed as the single largest foreign investment ever made in the country, Vodafone picked up a 5.65 per cent stake from US-based private equity firm, Warburg Pincus, and 4.4 per cent from Bharti Enterprises, promoted by the Bharti Group CMD, Sunil Bharti Mittal.
Vodafone will now be the second foreign investor in the Bharti Group. SingTel of Singapore is the other, with over 30 per cent stake. Vodafone also gets two board seats and rights equal to those of SingTel.
For the Indian telecom industry, it was a big event. It marked Vodafone’s “second coming”, as it were. It had left India in 2003 when it sold its 20.7 per cent stake in regional mobile operator RPG Cellular to Aircel. And the purchase came soon after the Indian government raised the FDI limit in telecom to 74 per cent.
There was euphoria all round. Analysts say the deal represents a win-win situation for both companies. It gives Bharti three things: access to foreign funds to implement its gigantic expansion plans; a higher valuation; and expertise in 3G in preparation for when it launches 3G.
For Vodafone, it is an entry into one of the world’s fastest growing telecom markets. It gains a pan-Indian presence in a mobile sector that has been adding over 2.5 million subscribers a month and a market for 3G.
There is some speculation, however, that Vodafone might have overpaid for a mere 10 per cent stake. It is a fact that the ??34 billion company would have preferred to buy a larger stake. But Vodafone officials dismiss the suggestion that a 10 per cent stake will leave the company with too little leverage and no dividends.
International analysts note that 10 per cent is the bare minimum that Vodafone would need. Vodafone’s Indian-born CEO Arun Sarin says he is happy with it: “This transaction is consistent with Vodafone’s strategy of developing our global footprint in growth markets. We expect dividends to come in soon enough.
What attracts Vodafone is the fact that India is Asia’s third largest economy, with a population of 1.1 billion and 65 million mobile phone customers. It is not only fast growing but also politically stable. Moreover, the government has now allowed foreign companies to own 74 per cent of telecom operators.
“From our point of view, Bharti was an interesting company because they are a GSM player, they are the number one market share player, they have an entrepreneurial management style and, more importantly, have a pan-Indian presence,” says a Vodafone official.
Vodafone has acquired minor shares in emerging markets before. Today, it has direct equity exposure in 27 markets and indirect equity holding in four others in Africa, such as operating companies of Vodacom South Africa where it holds 35 per cent equity. Out of these it has controlling stakes in 19 companies.
The markets where it has a minority equity interest include Belgium, France, Poland, Switzerland, China, Fiji, Egypt, Kenya and now India.
This is the third major deal for Vodafone this year. It acquired 99.9 per cent equity of Oskar Mobile in the Czech Republic and increased its stake from 20.1 per cent to 99.1 per cent in MobiFon of Romania from Canada’s Telesystem International Wireless, for a cumulative value of $3.5 billion. It is also in the race for Turkish operator Telsim Mobil Telekomunikasyon Hizmetleri.
Though a minority interest will not allow Vodafone to establish its own brand, it is a good market-entry strategy. For instance, it picked up a 3.3 per cent stake in China Mobile in 2000 for an investment of $2.5 billion.
For Vodafone, tapping new markets is what it does best. From a small start-up in 1984, the company has grown both in size and stature over the years, mainly through acquisitions and alliances across the globe.
As of June 2005, Vodafone had 165 million subscribers, including those who are part of companies directly under its control as subsidiaries or affiliates and those who are part of its partner networks. With the Bharti deal, its total subscriber base will shoot up by more than 9 per cent.
According to market watchers, this new acquisition will also give Vodafone the second largest subscriber base after the US, even ahead of China among its affiliates. On a global basis, India will be the fourth biggest market in terms of subscriber numbers, behind Germany, the US and Italy.
Though Vodafone’s future India strategy is yet to emerge, it’s thought that the company may be interested in increasing its stake later, depending on asset prices and market dynamics. It may look to buy SingTel’s stake in Bharti, for example, or wait for the promoters to dilute their stake. Sunil Bharti Mittal, however, has said he has no plans to dilute his stake. So, at this stage, any speculation about Vodafone’s future strategy is too premature.
