Jeremy Warner's Outlook: Vodafone's Sarin turns acquisitive once more. The City may be in the mood to back him

Gaffe is on the button about HSBC; Higher growth, squeezed incomes
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Vodafone has long been a tug of war between those in the City who would like to see the mobile- phone goliath broken up, and a hot-to-trot management, keen to continue the project begun by Chris Gent of building a truly global presence with networks in all the world's major markets. The City has thus far largely succeeded in keeping Arun Sarin, Sir Christopher's successor, on a short leash; he's returned far more to investors than he's been allowed to spend. But every now and again, he shows signs of breaking free.

Should he be allowed to enter a bidding war for one of India's big four mobile phone operators, Hutchison Essar? I should qualify any assessment of this question with the observation that nobody is yet sure if the asset is even for sale, and certainly anything pitched at the current enterprise value of $15bn wouldn't so much as be given the time of day.

To tempt Li Ka-Shing, the majority owner, it will have to be well north of the present valuation, which has already been inflated by bid speculation. To win the prize, Mr Sarin will have to pay up. What's more, such is the fevered state of excitement about India's growth potential that every man and his dog will be in hot pursuit. Bolstered by Blackstone's billions, Anil Ambani's Reliance Communications is thought already to have put an offer on the table. In these circumstances, the chances of Vodafone overpaying, as it did for mobile assets at the top of the dotcom boom, would seem quite high.

The position is further complicated by the fact that Vodafone already owns a 10 per cent stake in the market leader in India, Bharti Airtel. For choice, that's where Mr Sarin would be increasing his exposure. Yet Sunil Mittal, the founder, has made it plain his controlling 45 per cent stake is not for sale. The other major shareholder, Singtel, with 15 per cent of the equity, isn't a seller either.

With the prize of control at the rival operator, Hutchison Essar, now potentially up for grabs, Mr Sarin is keen to switch horses. There is a touch of déjà vu about his plans. Mr Sarin attempted to do the same in America when he first became chief executive three and a half years ago. In the end, the City blocked him from paying up in the auction for AT & T Wireless. He's had instead to content himself with Vodafone's pre-existing, minority stake in Verizon Wireless. In America, as in India, control has thus far alluded him.

In India, at least, there now seems an outside chance of it. A year ago, Mr Sarin couldn't have dreamt of making such a move. With the Vodafone board at war, it seemed only a matter of time before he would be axed and a break-up artist brought in in his place. Yet he survived.

The business and the share price have now revived. What's more, some of the deals he has managed to get past sceptical investors now look rather clever. At the time, his acquisition in Turkey was much criticised for being overpriced. It now looks a steal, as does the 10 per cent stake in Bharti.

With once fat margins in mature Western markets now under intense pressure, expansion into the growth markets of Asia is a strategy of unarguable merit. Only a few weeks back, Vodafone seemed to prepare the ground for a swoop by holding an emerging-markets investors conference. The new chairman, Sir John Bond, newly arrived from HSBC, would also seem a natural for such a strategy. The only problem is the price. With all that growth potential - India is still at less than 15 per cent penetration - these assets do not come cheap.

On the face of it, Hutchison Essar fails the self-imposed valuation ceiling Vodafone has set for acquisitions so as to demonstrate to the City that it is not being irresponsible with the shareholders' money. It's just too expensive. Unless, of course, you take the view the potential is so vast it should override these constraints.

What looks expensive today could easily seem extraordinarily cheap in 10 years' time. Is the City ready for another burst of dotcom-style forward thinking? The last such dash for growth ended very badly indeed. Those crazy valuations were never justified. Yet it is now or never.

The merger mania which again grips the capital markets makes conditions more conducive to deals of this sort than they have been in years. With a number of recent disposals under its belt, Vodafone also has the cash to make it possible. But have investors sufficiently recovered their appetite for risk? Hutchison Essar will be an interesting test.

Gaffe is on the button about HSBC

As apologies go, they don't come much more grovelling than the one proffered to HSBC yesterday by Threadneedle Investments over remarks attributed in a rival newspaper to its outgoing head of equities, Michael Taylor. Just to repeat this gloriously embarrassing piece of candour, Mr Taylor apparently said: "We had Stephen Green [chairman of HSBC] in here two weeks ago, and, cor, he was asleep on the job is how I would describe it. He's just not up for it". We can only assume Mr Taylor didn't know he was going to be quoted, or, because he's leaving, didn't care. Few fund managers are ever persuaded to be so outspoken.

Yet despite the apologies, Mr Taylor spoke for the City in dismissing HSBC as a dog. The bank is widely seen as institutionally arrogant. If there was good reason for this self-belief, it might be tolerable. In fact the reverse is the case. Unlike almost every other banking stock on the planet, the shares have gone nowhere over the past three years, a degree of underperformance that dates back almost exactly to the bank's misjudged acquisition of the US sub-prime lender, Household.

At the time, HSBC gave lots of quite credible reasons for believing that credit quality among the trailer-park customers Household specialises in lending to was really much better than it used to be. Somewhat predictably, these reasons turned out to be wrong and, with interest rates now much higher, HSBC is experiencing quite serious rates of default on its consumer debt, both in the US and Britain.

Back then, HSBC was the height of fashion. The global banking model it epitomised was widely thought the only way to go, and the rest were toast. How strange, then, that the best performing share price among UK-based banks over the last three years is HBOS, whose business is almost exclusively confined to these shores. Mr Taylor was very rude in what he said about Mr Green, but he strikes a chord in questioning why the share price has made so little headway under Mr Green's watch. Something is not working at HSBC. Urgent steps need to be taken to address whatever these failings might be.

Higher growth, squeezed incomes

No Chancellor in recorded British history can boast such a record of uninterrupted growth as Gordon Brown. It's his big achievement, underlined again yesterday by upward revisions to GDP showing the economy grew by 2.9 per cent in the third quarter.

Unfortunately for him, as he prepares to take the keys to No 10, comparatively few of us seem to be benefiting. Having risen quite sharply during Labour's first two terms of office, disposable incomes are now being sharply squeezed. The economy may be growing, but it doesn't feel like it. Many of us are getting worse off. One of the primary reasons for this, as our story on page 44 reports, is rising levels of taxation. Tax now takes a higher proportion of income than at any stage since records began.

Rising inflation and mortgage costs further accentuate the squeeze. When incomes get pinched in this way, employees attempt to claw it back with higher wage claims. As the main pay-bargaining season approaches, workers are preparing some hefty demands. The extent to which they succeed depends on how much slack there is in the economy. Globalisation and immigration may act as a brake. If they don't, the Bank of England will punish us with higher interest rates. One way or another, the squeeze on disposable incomes looks set to persist. And a poorer workforce makes for an unhappy electorate.

j.warner@independent.co.uk

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