Debt-laden Vodafone shells out $750m for another 1 per cent of China Mobile

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The mobile phone operator Vodafone will pay out $750m (£514m) to increase its stake in China Mobile, China's biggest mobile phone operator, by just over 1 per cent.

The British company which is coming under increasing pressure to prove it can keep growing organically, will see its stake in China Mobile rise to 3.27 per cent from 2.18 per cent.

The move came as China Mobile announced plans to buy eight provincial phone networks from its parent company in a deal worth just over $10bn.

Vodafone said it would pay $750m for 236.6 million new China Mobile shares at a price of 24.72 Hong Kong dollars a share – a 4.5 per cent discount to the company's closing share price yesterday.

The deal also gives Vodafone, which has an estimated £14bn to £15bn of debt, the right to appoint one non-executive director to China Mobile's board.

While analysts believed Vodafone had got the new shares at a reasonable price, they were divided on whether the move made strategic sense. Its shares closed down 1.5p at 110.5p.

"The rationale in Vodafone's thinking is clear," analysts at Schroder Salomon Smith Barney said, noting the company would gain the stock at a discount along with a board seat.

They questioned, however, whether the capital should be deployed "in buying in undervalued listed minorities" or on buying back shares in Vodafone.

Another analyst said: "They're buying it [the extra shares in China Mobile] for cheaper than it was trading at last night so it stacks up financially. We think China Mobile is undervalued and therefore it's a good opportunity but is that the best use for the money? I'm not sure,"

Vodafone argued, however, that the purchase would increase its exposure to the world's biggest mobile phone market, in terms of customers, and would strengthen its strategic partnership with China Mobile itself.

A spokesperson for the company pointed out that market penetration in the country stands at about 12 per cent but about 5 million mobile customers are added a month.

"It [the deal] helps cement their [Vodafone's] role as a strategic partner and China is seriously under-penetrated and will be a massive engine for growth in the future," one City source said. "They get a board seat and there'll be serious amounts of swapping of information as well."

Once China Mobile has completed its purchase of the eight networks, it will have more than 100 million mobile phone customers, challenging Vodafone, with about 101 million customers, as the world's biggest operator.

China Mobile is paying $8.57bn, including a cash payment of just over $3bn, for the networks but will also take on debt of about $1.6bn.

Sir Christopher Gent, Vodafone's chief executive, said: "This is an excellent opportunity for Vodafone to increase its stake in China Mobile and I expect further benefits to arise from an increasing level of co-operation between the world's two largest mobile operators."

He also noted that the buy would enable Vodafone to get a cash return since China Mobile said it planned to start paying out dividends. The first payment is due at the end of this year.

"I am also pleased that China Mobile has committed to the payment of dividends, which, together with our increased exposure to the world's largest mobile market, we expect will create long-term value growth for Vodafone," Sir Christopher said.

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