Jeremy Warner's Outlook: Has Sarin got himself a bargain in Hutchison, or is this more a case of Indian rope trick?

Surprise as MyTravel switches horses; G7 confirms its own irrelevance
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The Independent Online

Few doubt the strategic logic of what Vodafone's Arun Sarin is doing in buying one of India's largest mobile phone operators, Hutchison Essar. Hutchison will reinfuse Vodafone with a growth profile which seemed to have all but disappeared in mature and viciously competitive European markets. In this respect, the acquisition looks more than justified. Rather, it is in the $19bn cost of buying this growth potential that the worries creep in.

By historic standards, this is hardly a big outlay for Vodafone, which at its peak was paying much larger sums and fancier valuations for its mobile assets. Yet it is the lessons learned during the dotcom bubble, and the subsequent destruction of shareholder value at Vodafone, that lead everyone to be so cautious. Is not Mr Sarin in danger of repeating the mistakes of the past in his dash for growth?

Even on his own, somewhat nebulous, financial criteria for emerging-market acquisitions, he's close to the upper limits. Hutchison doesn't reach return- on-capital requirements until year five, and, taking account of amortisation of goodwill, the acquisition remains earnings dilutive until then.

What's more, in projecting that the acquisition is within the criteria, Vodafone assumes both that the mobile phone market in India will grow by 40 per cent over the next five years and that its own market share will grow from the present 16 per cent to between 20 and 25 per cent. Given the fact that mobile phone penetration is just 13 per cent in India at present, and that Hutchison has no network coverage as things stand in around a quarter of the country, these targets may if anything look on the conservative side.

Even so, that's a lot of growth Vodafone has got to deliver to make the acquisition wash its face. Mr Sarin argues that the potential justifies what he's had to pay for it. But if it were really so easy to realise that potential, why is Hutchison's Li Ka-Shing selling? His calculation must be that he's had most of the upside already.

My own view is that we must give Mr Sarin the benefit of the doubt. Prospects for mobile telephony in India, where the absence of infrastructure makes it an alternative method of delivery for a multitude of different services, are among the most exciting in the world. India's growing middle class and youthful demographics further magnify the attractions.

Surprise as MyTravel switches horses

Pity poor old Peter Long, chief executive of First Choice. There he was in the middle of what everyone thought was an auction between MyTravel and Thomas Cook for his package holidays business, with the mouthwatering prospect of £500m-£700m in cash to hand back to shareholders at the end of it, when all of a sudden his two suitors abandon the chase and hop into bed with each other instead.

Mr Long would never have put his business on the block in the first place had not MyTravel approached him and suggested a consolidating deal. Now he's been left out in the cold, and made to feel it too, with a punishing 14 per cent fall in the share price. Yet in every cloud there is usually some sort of a silver lining, and, for Mr Long, it is that even a consolidation between two of his largest competitors is better than no consolidation at all.

The resulting reduction in capacity is likely to be as good for him as it is for the still-struggling MyTravel and Thomas Cook. There is also the very real possibility, present in all such mergers of equals, that two and two will end up equalling three. First Choice is likely to be one of the biggest winners from any resulting failure in execution.

All the same, this is plainly a better deal for both MyTravel and Thomas Cook than the alternative, where potential synergies risked being dissipated in the overpayment for First Choice likely to result from an auction. The new company emerges debt-free and quite a bit bigger than would have been possible under the alternative combination. For MyTravel shareholders, the deal is a particularly good one, as the German-owned Thomas Cook is paying a big premium for control.

Will the competition authorities allow it? Even five years ago, the answer would certainly have been no. The growth of the low-cost airlines makes dominance of the package holiday market less of an issue than it once was. There are now good alternatives for holidaymakers to shop from non-traditional operators.

G7 confirms its own irrelevance

What a complete irrelevance the G7 has become. Last weekend's meeting in Essen, Germany, produced the startling observations that markets should avoid one-way bets, that policymakers should be vigilant about the growth of hedge funds, and, in an apparent reference to the undervalued yen and renminbi, that eventually economic fundamentals will out and the markets will adjust accordingly.

In the event, the markets reacted with what looked remarkably like two fingers to this banal list of platitudes by marking the yen down still further against both the euro and the dollar. If the intention had been to reverse the slide in the yen, then it plainly failed. The reasons for that failure are fairly obvious. The Americans don't, on this as on so many other issues, see eye to eye with the Europeans, and the Japanese don't agree with either of them.

It is the Europeans who are most concerned about the weakness of the yen. This is partly because their own currency appreciation against the yen has been a more significant one than that of the dollar, undermining the competitiveness of export industries.

The trade and capital imbalances that exist between Asia and America are also of a more symbiotic nature than they are with Europe and therefore more tolerable. America imports a lot from Asia, but this is countered by equally large inflows of capital from these regions, which help keep long-term interest rates low and the dollar relatively strong.

America is therefore less concerned about these matters than Europe. As for Japan, with still incredibly low consumer price inflation, there is no obvious reason why policymakers would want to risk economic recovery by doing the Europeans' bidding and jacking up interest rates.

One of the reasons for European concern about the yen is the belief that the exchange rate and therefore trade is being distorted by so-called "carry trades", whereby investors take advantage of interest-rate differentials by borrowing cheaply in yen and then lending in regions where money is dearer, such as America and Europe. European policymakers tend to argue markets are not as a result adequately pricing risk. Well, maybe, but might not the better explanation be a rather more benign one - that America and Europe are attractive places to invest Asia's surplus capital? In any case, the G7 is unlikely to reach a consensus on these matters any time soon.

Yet failure to agree common cause is not the biggest reason the G7 has become irrelevant. Like other global gatherings, its constituents have also failed to keep pace with a changing world. Power and influence is beginning to seep away from the developed West.

As long as the G7 excludes the fast-growing economies of the developing world, and particularly those of China, India and Brazil, its communiqués will continue to look to large parts of the world like no more than pompous grandstanding. The British Government is right to argue for much larger gatherings, yet it is not clear the world is ready for global government quite yet.

The Chinese finance minister was invited to last weekend's meeting. If he had any influence on proceedings, it is hard to know what it might have been. Nor is there any evidence to suggest the developing world is willing to compromise its policies to accommodate the demands of others. China, in particular, has a history of only co-operating on the international stage if it thinks such action is directly in its own interests. If the G7 has become irrelevant, there may be little hope too for any wider successor gathering.

j.warner@independent.co.uk

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