City worried Vodafone may overpay for Indian foothold

Vodafone is set to launch a £7bn-plus offer for the Indian mobile phone operator Hutchison Essar as the company prepares to fight off rival bids for India's fourth-largest telecoms carrier.

Arun Sarin, the chief executive of Vodafone, held a board meeting yesterday to discuss the company's plans and is understood to have won backing for a plan to switch out of its 10 per cent stake in Bharti Airtel and pursue a majority stake in Hutchison Essar.

Vodafone would not comment on the situation but it is understood that the British mobile phone company will detail its intentions in one of the world's fastest growing mobile markets over the coming days. Its executives are due to meet Hutchison's managing director, Canning Fok, and Essar's Ravi Ruia in London today.

Shares in the mobile giant drifted 1.5 per cent to 143.75p as investors feared that the company could become embroiled in an expensive bidding war. However, the company's major shareholders are thought to be comfortable with the bid and support Mr Sarin's refocusing of Vodafone's operations toward high-growth regions.

Analysts said a bid that valued the Indian operator at around £7bn was pricey but could be justified. Such a deal would value Hutchison Essar at over 20 times its expected earnings in the year to March 2007, representing a much richer valuation than the market leader Bharti which trades at around 16 times its anticipated profits.

Fanos Hira, an analyst at Bear Stearns, estimated the net cost to Vodafone, assuming a price of £7bn, would be around £3.8bn for 74 per cent ownership given it would sell its stake in Bharti. The broker said that Vodafone is at risk of paying too much.

Vodafone will almost certainly face competition for Hutchison Essar, with India's second-largest mobile telecoms company Reliance Communications expected to bid. The Egyptian operator Orascom, which specialises in emerging markets, and Malaysia's Maxis are also thought to be interested in the company while Bharti Airtel has yet to rule out a bid.

Reliance presents the biggest hurdle for Vodafone as the Indian company wants to bolster its GSM network. GSM is the mobile platform used in Europe and competes with the CDMA platform which is used predominantly in North America.

Nick Jotischky, an analyst at Business Monitor International, said an acquisition of Hutchison Essar presents Reliance, originally a CDMA-only player, with an opportunity to boost its GSM presence. He said that such a merger would create a clear market leader with a market share of about 36 per cent but is unlikely to be blocked by regulators due to the fragmented nature of the Indian telecoms market.

The top four players in the Indian market account for only 70 per cent of the total growth and only three of those companies offer national coverage. India is divided into 23 "circles" with separate licences in each area and a slew of small regional local companies are yet to be consolidated. Hutchison operates in around 16 of the circles.

If the company succeeds in buying the Hutchison Essar business, it would be its largest acquisition since the dotcom days when Sir Christopher Gent built a global mobile telecoms empire through a series of expensive acquisitions.

Over the past year, Vodafone has been withdrawing from mature western European markets and refocusing its attention on emerging markets. It has spent around £3.3bn on acquisitions in Turkey, Africa, Egypt and eastern Europe over the past 12 months. It also sold its troubled Japanese division for £8.9bn.

India represents one of the most attractive growth markets for telecoms companies alongside China. The number of mobile subscribers is expected to continue growing at a rapid rate as the device becomes the main communication tool for hundreds of millions of people who have no access to fixed-line phones and cannot afford computers. The surge in predominantly pre-pay users in India can be attributed to the availability of extremely cheap GSM-based mobile phones. Informa Telecoms & Media analyst Mark Newman said that in 2007 India is forecast to add over 66 million new users compared to around 68 million in China.

Mr Jotischky said that the number of Indian people with a mobile phone is expected to almost double in 2006 to 148.1 million subscribers. More than six million Indians are taking up mobile phone services a month, but the penetration rate is expected to remain low at 13.4 per cent.