Last month, the Bharti Group created telecom history of sorts by bringing in what is being described as the biggest foreign investment in the country. At a hurriedly called press conference in endOctober, the company announced a strategic tie-up with the world’s leading telecom service provider, Vodafone Group Plc.
The British telecom giant picked up 10 per cent stake in Bharti, India’s largest mobile operator with over 14 million subscribers, for a whopping Rs 67 billion (Rs 351 per share). It bought out 5.65 per cent stake from New York-based equity investor Warburg Pincus and 4.4 per cent from Bharti Enterprises. Warburg Pincus is now completely out of BTVL the flagship company of the Bharti Group.
The exact figures of the sale are not available but, based on BTVL’s valuation at Rs 670 billion, market sources estimate that Warburg Pincus got close to Rs 37 billion from the deal while Bharti Enterprises received Rs 30 billion.
The new equity structure of BTVL is as follows. The controlling 45.9 per cent stake remains with the company; SingTel has 15.71 per cent; and Vodafone 5.65 per cent. The public holds the rest.
Vodafone also gets two seats on Bharti’s board and rights similar to those of SingTel, the larger Bharti shareholder. Analysts are, however, not very clear as to how this can be implemented, especially since Singtel has 30 per cent stake in the Bharti Group while Vodafone will have 10 per cent.
Vodafone’s second coming in the country is being viewed with a lot of interest ?? and enthusiasm.
Vodafone had quit its first venture with RPG Cellular by selling a 20.7 per cent stake to Aircel in 2003. The reason it gave for its exit was that RPG, being a regional player, did not offer it a national presence.
With the Bharti deal, however, it is quite the reverse. An integrated telecom player with a presence in the mobile, fixed line, national and international long distance segments, Bharti offers Vodafone a substantial national presence in all 23 circles. It has a cellular subscriber base of 14.07 million (as of end-September 2005) and a 1 million broadband and fixed line subscriber base.
“The Bharti-Vodafone agreement is extremely significant from both Bharti’s and Vodafone’s point of view. Vodafone is the world’s largest mobile company and for it to not be represented in India was certainly not acceptable to it. Bharti, on the other hand, got an extremely good price for its stake. It is clearly a good deal from Bharti’s viewpoint. Vodafone’s presence in the market is strategic too. The fact that it has two seats on the board is an indication of how seriously Vodafone takes this investment. It will certainly give a big boost to the telecom sector and to other Indian companies contemplating IPOs,” sums up telecom analyst Mahesh Uppal, director, TCIS.
Sunil Mittal, chairman and group managing director of Bharti, is clearly pleased with the outcome. “Vodafone made a call on the Indian telecom sector and chose BTVL as the vehicle to develop its continuing interest in the Asian region,” he notes. “Bharti has had the privilege of tying up with the best in class of blue chip companies from around the world, who have joined hands with Bharti at different stages to develop the telecom sector in India.
For Bharti, the deal not only ties it to the world’s largest telecom operator, it also brings in the biggest foreign investment into the telecom sector to date. This has helped to increase the company’s overall valuation. At Rs 670 billion (about Rs 5 billion more than its current market cap) Bharti’s closest private sector GSM rival, Hutchison Essar, is way behind with a valuation of only Rs 210 billion.
Vodafone, a global leader in nextgeneration telecom services, is expected to play a particularly big role as and when 3G services are introduced in India. “One of the main reasons for our choosing Vodafone is its expertise in 3G. We believe our partnership with Vodafone will make us the most prepared operator in India to offer 3G services,” says Mittal.
There has been some speculation that Vodafone perhaps paid too much for a mere 10 per cent stake. But what the company stands to gain from the deal is a foothold in one of the world’s fastest growing telecom markets.
In fact, India’s telephony market is growing rapidly as economic growth and low telecom tariffs expand its consumerspending pattern. With more than 66 million mobile users, the market growing by 2.5 million users a month and with a huge untapped rural market, India offers a vast potential. Recent Gartner estimates describe India as “soon to become one of the world’s biggest markets”. According to Gartner, China and India would together account for nearly 200 million units in 2007 and the Indian market would surpass China’s in 2009 to reach 139 million units.
For Vodafone, which has operations in 27 countries across five continents with 165 million subscribers and a market capitalisation of $150 billion, a strategic stake in Bharti provides an ideal comeback vehicle. This deal comes on the back of a couple of other acquisitions made by the company this year in Central and Eastern Europe. Earlier this year, it had stated that it was looking to expand its presence in Asia, France, Poland and other growth markets, particularly India.
In fact, it had been closely following developments in the Indian telecom sector. In the post-unified licence scenario, larger operators had been investing hugely to acquire a pan-India footprint, giving a fresh impetus to the sector. The ??34.1 billion British telecom giant was known to be scouting for the right opportunity to enter the booming Indian telecom sector. In fact, it made a serious bid to buy out BPL Communications early this year, but the stake was later taken up by Hutchison Essar.
Vodafone’s India-born CEO Arun Sarin puts the deal in perspective. “This transaction is consistent with Vodafone’s strategy of developing our global footprint in growth markets. We are happy with 10 per cent equity in Bharti and I believe that we will stay good partners. We can provide a lot of value in Bharti. For instance, we purchase equipment worth $10 billion every year and here Bharti can leverage our buying power.
At the time of signing the deal, Sarin noted that Vodafone was keen on Bharti not only because the company is a large national player, but also because of its strong entrepreneurial DNA. India, of course, was an obvious choice as it presents tremendous opportunity: the country has a mobile phone penetration of 6 per cent compared to more than 28 per cent in China and over 100 per cent in parts of Europe.
The Indian telecom market, on its part, is excited about the Vodafone entry. It is expected to kick off a new phase in consolidation. The deal also comes soon after the government gave its approval to the hike in foreign direct investment (FDI) in telecom to 74 per cent.
According to Prashant Singhal, communications industry leader and director, Ernst & Young (India), “Big-ticket investments like the Vodafone-Bharti deal will only accelerate the march towards the ambitious target of 250 million subscribers in two years. We will need investments worth approximately $10-$12 billion. The lack of a large number of international investors in the sector in the past was a reflection that investors were waiting for the FDI limit to go up. We expect some action in six months to a year at best. It would be interesting to observe large telecom operators buying into the Indian telecom sector and the size of the assets they bring into the market.
At the moment, analysts do not have any clear answers on Vodafone’s willingness to pay a premium on the market price and to ramp up Bharti’s valuation. Except that it stems from optimism about Bharti’s future prospects and is a long-term investment in the growing Indian telecom sector.
There has also been speculation that Vodafone may increase its stake in Bharti at a later date, by either buying out part of SingTel’s share or picking up more stake from the Mittals. But this remains to be seen. On the face of it, Bharti has no intention of selling more of its stake. “We have given a small stake to Vodafone to ensure the entry of the company into India. We remain the single largest shareholder (Bharti Enterprises holds 46 per cent stake through Bharti Telecom) in BTVL and we have no intention of diluting our stake any further, not even later on,” Mittal claims. There is some concern though about how Bharti will manage two big telecom investors at one time. As for Vodafone, it remains non-committal. “Our future strategies in India will depend on asset prices and market dynamics,” say company officials.
For the sector, though, it is an exciting phase. As Mittal puts it, “The telecom sector has witnessed unprecedented growth this quarter. Bharti too will scale up its capex plan for the year ending March 2006 by 20 to 30 per cent. As against a total of $1 billion projected earlier, the company will invest $1.2-$1.3 billion.
Meanwhile, BTVL has reported a 43 per cent increase in net profit for the quarter ended September 2005 at Rs 5.21 billion as compared to Rs 3.64 billion in the corresponding quarter of the previous fiscal year. Total revenues on a consolidated basis for the quarter reported an increase of 46 per cent to touch Rs 27.09 billion compared to Rs 18.51 billion in the corresponding period last year. EBITDA for the quarter was also up by 47 per cent at Rs 10.21 billion and for the first half, EBITDA on a consolidated basis was at Rs 19.62 billion, an increase of 49 per cent.
The company has big plans lined up for the future and plans to use Vodafone’s expertise to enhance its products. The Vodafone brand will not be immediately visible in India, but as a start-up to the cobranding arrangement, users will get to see it at entry points into the UK and India. As part of the co-branding, an Airtel subscriber on international roaming will be able to access Vodafone’s services in a country where it operates and vice versa.
Overall, as Rajat Sharma, industry analyst, says, “The deal is momentous for the Indian telecom industry. At a macro level, it highlights India on the global telecom map as a country holding immense potential and urges global investors to invest in India and realise its untapped potential. At a micro level, it is a win-win situation for both companies.”
