Vodafone bags a Christmas Turkey

UK group beats off Middle Eastern competition with £2.5bn bid for mobile operator Telsim
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The Independent Online

Vodafone delivered Turkey for Christmas yesterday with its surprising victory in the auction for the Turkish mobile phone operator Telsim.

Its winning $4.55bn (£2.6bn) bid saw off several aggressive middle-eastern rivals flush with petrodollars and fuelled concerns that Vodafone had overpaid. That, and news that the acquisition will dilute earnings per share for up to five years, unsettled investors.

Vodafone shares were marked 3.5p lower to 124.75p in one of the steepest falls by a FTSE 100 company yesterday.

The world's biggest mobile phone operator will plough a further $1.2bn into Telsim over three years to improve network coverage, exchanges and billing. During that time, its new business is slated to make a net loss.

Christian Maher, a telecoms analyst at Investec Securities, said: "Telsim looks very, very expensive on any metric. We see the deal as a very expensive lurch for growth." He recommended that clients reduce their Vodafone holdings.

Vodafone, led by chief executive Arun Sarin, insisted the price was fair for a foothold in one of the few European telecommunications markets to still offer room for growth.

In a country of about 72 million, Telsim is the second-biggest operator with almost 9.5 million customers. Only around half of all Turks own a mobile. Its population is young and fast-growing. By 2010, there will likely be more Turks than Germans.

Julian Horn-Smith, Vodafone's deputy chief executive, said: "Do not underestimate Turkey as an economic powerhouse in Europe in years to come. We expect revenues there to grow by 20 per cent per annum from 2005. It will be very significantly earnings accretive [for the group].

"I can assure you that this is not based on any kind of deal addiction. I can categorically assure you that we have not paid any strategic premium at all."

He dismissed the City's lukewarm reception to the deal: "Short-term share movements will not determine the value of this business, which is very, very good value," Mr Horn-Smith said. "Shareholders have underestimated the growth this gives to Vodafone in future."

To hit those growth targets, Vodafone must stand toe-to-toe with Turkcell, the runaway leader in the Turkish mobile phone market with nearly 27 million customers. Telecom Italia Mobile has around 6.5 million Turkish customers.

Vodafone said that in Spain and Hungary it had a proven track record of prising customers from bigger players. Turkey will be its fourth-biggest market as it expands outside Western Europe, where growth is sluggish.

Since October, the Newbury-based company has lifted its stake in its South African operation and stumped up $1.5bn for a 10 per cent stake India's Bharti Tele-Ventures.

The Telsim acquisition will have any no impact on either Vodafone's share buy-back programme or credit rating.

Turkey's growing economy, accelerating privatisation programme and drive to join the European Union has triggered a surge in direct foreign investment. Mr Horn-Smith said he had been encouraged to buy Telsim by Sir John Bond, Vodafone's chairman-elect, who had already overseen a successful Turkish foray while chairman of HSBC, the global banking group.

In a televised auction in Istanbul, Vodafone outbid Kuwait's MTC by $20m, Egypt's Orascom and Emaar of Dubai. Russia's Sistema and Etisalat of the United Arab Emirates were eliminated earlier on after they submitted the lowest sealed bids.

Turkey's Savings and Deposits Insurance Fund put Telsim on the block after seizing it from the Uzan family in the wake of the collapse of its Imar Bank in 2003. That saddled the Turkish government with $6.5bn debts. It had set a reserve price on Telsim of $2.8bn.

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