Business View: Vodafone investors can't have their naan and eat it too

If you balk at the price of an Indian takeover, don't moan about growth
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The Independent Online

The City donned its salopettes last week and took to the slopes of Aspen, St Anton and other retreats where overpaid bankers spend time relaxing on the snow-starved pistes. So not much was happening back in the Square Mile, where cleaners seemed to be the only ones at work.

The one deal that is keeping everyone on their toes is the imminent sale of Hutchison Essar, the giant Indian mobile phone group. Hutchison Whampoa, the Hong Kong conglomerate, sparked the takeover frenzy when it announced before Christmas that it was to offload its 67 per cent stake in the Indian group.

The auction is of great interest on these shores because Vodafone is set to bid up to a reported $20bn (£10.4bn) to get its hands on Hutchison Essar. The UK group faces a stiff challenge from the billionaire Hinduja brothers (they of Peter Mandelson passport scandal fame), Essar itself, which owns 33 per cent of Hutchison Essar, and Reliance, which operates India's third-largest mobile network.

Whoever ends up winning the auction run by Goldman Sachs will inevitably have to pay a hefty premium to bag its prize.

Vodafone is stuck between a rock and a hard place. It would dearly love to acquire Hutchison Essar as this would leave the group ideally placed to benefit from one of the largest and fastest-growing mobile markets in the world. Analysts have been fretting about Vodafone's growth prospects for years but a large acquisition in India would solve that problem.

Vodafone has proved with its $4.5bn acquisition of Turkey's Telsim that it is good at integrating new businesses into its global portfolio.

At the time, investors agreed that Vodafone had paid over the odds for Telsim, but since then the acquisition's performance has comfortably exceeded expectations.

However, Arun Sarin, the chief executive of Vodafone, has already told investors that the company will now only mount takeovers if it can get a return that exceeds its cost of capital by at least 200 basis points.

If Vodafone is forced to dig deep to capture Hutchison Essar, then it will be down to Sir John Bond, the company's chairman, to persuade jittery institutional investors of the wisdom of making the acquisition.

Many still remember how they were persuaded to back massive rights issues that allowed Vodafone, when the company was run by Sir Christopher Gent, to become a global giant through a series of overpriced takeovers.

Sir John will have to convince the same fund managers that this time the situation is different.

Anyway, investors can't whinge about Vodafone's growth pros-pects if they are not prepared to back the company in what will be an expensive strategy to enhance its prospects in the world's biggest developing markets.

Opportunities like Hutchison Essar don't come along very often. To quote Irving Berlin: "Life is 10 per cent what you make it and 90 per cent how you take it."

Full Marks for Rose

If I hadn't given up all vices in a fit of new year resolution making, I might have raised a glass of bubbly to Stuart Rose, the chief executive of Marks & Spencer. The retailer is set to report a bumper set of Christmas trading figures as it continues to dazzle the market. Not only is the company doing well under Mr Rose's careful stewardship, its staff are about to share in a £56m windfall secured through a workers' share scheme. Some will pocket £45,000.

Mr Rose also decided that M&S stores would remain closed on Boxing Day to give staff an extra day off after all their hard work in the run-up to Christmas. It can't be too long before some politician dubs him the "responsible face of capitalism".