Name: Johar Menezes Roll No: 519

The Vodafone India story

Vodafone India or Vodafone Essar, as the company is called, has been a result of subsequent acquisitions and mergers between foreign and domestic entities over the years. The present success of Vodafone Essar cannot be attributed to Vodafone alone. But it has been due to intelligent branding and smart marketing strategies that have been adopted by the various companies involved, whether it was the Orange campaign, the symbolic pug, the Zoozoo ads or the emphasis on customer service.

Prior to Vodafone
It all started with the Government of Indias initiatives to deregulate the telecom industry and increase foreign equity. In the year 1992 Hutchison Telecom (HT) part of Hutchison Whampoa, a multinational conglomerate based in Honk Kong formed Hutchison Max along with its Indian partner Max Group to enter the lucrative and untapped mobile telephony Indian market. It began operations with caution by first targeting the markets of Mumbai, the financial hub of India under the brand name of Max Touch which was later changed to Orange. Then later on seeing its success it entered into a joint venture with Essar in the year 2000 to gain entry into the markets of Delhi, Kolkata, and Gujarat. Later on it started offering GSM services in Karnataka, Andhra Pradesh and Chennai. In the year 2003 it acquired AirCel Digilink, an Essar subsidiary to operate in Rajasthan, Uttar Pradesh East and Haryana. In the year 2005 it acquired BPL Mobile Cellular Ltd, the holder of cellular mobile telephone licences for Maharashtra, Tamil Nadu and Kerala.

The Vodafone Hutchison deal

Just a year prior to its purchase of a controlling stake in Hutchison Essar, Vodafone had reported a huge loss of 22 billion. This was mainly because of write offs due to some of its acquisitions which had gone bad. In spite of this the Vodafone Group went ahead with the process of acquiring a 67% stake in Hutchison Essar in the year 2007. There were many reasons for this strategic move by Vodafone. The most obvious ones were access to the fastest growing mobile phone market which was expected to touch 500 million subscribers by 2010; Cellular penetration in rural India which comprised of 67% of Indias population was below 2% at that time; There was also a big opportunity to offer 3G services which had not been introduced in India till then whereas Vodafone had already been offering this service in other countries. On

the other hand Li Ka-shing, who owned the 67% in Hutchison Essar, was more than happy to offload his stake. The Indian government had been wary of his clandestine links with China. It had earlier thwarted his plans to invest in Indian ports for security reasons, plus his relations with the Ruia family who controlled Essar had not been that great. On March 31, 2011, Vodafone made clear its intentions of buying another 33% stake from Essar. Accordingly Essar exercised its put option to sell 22% of its stake while Vodafone exercised its call option of buying the remaining 11%. This additional acquisition would exceed the 74% FDI limit imposed by the government. Hence to comply with the rules Vodafone has agreed to sell the excess stake to an Indian entity and has given November 2011 as the deadline to finalize the deal.

Valuations
Vodafone has agreed to buy the 33% stake from Essar for $5 billion. This values Vodafone Essar at $15 billion. On the other hand the market cap of Bharti Airtel is close to $31 billion which is nearly double that of Vodafone Essar. Now when you consider the subscriber base of both the companies, which is around 131 million for Vodafone Essar and 160 million for Bharti Airtel it appears that the valuation of Vodafone Essar is relatively lower, as the subscriber base is what determines the revenues. Now consider the 2007 deal wherein Vodafone had acquired 67% stake in Hutchison Essar for $11.1 billion. This made the company worth $16.6 billion then. This means that either Vodafone has lost value over the years or it is getting a good bargain from the deal. I have also compared the charts of Bharti Airtel and the Sensex in Google finance and found that Bharti Airtel has consistently outperformed the Sensex since the Vodafone Hutchison Essar deal in 2007, except for the period between the end of 2009 till the mid of 2011. To conclude I would say that Vodafone is getting a good deal in the process as the valuation of the Vodafone Essar stake is far lower than that of its closest rival, Airtel which has almost the same subscriber base, not to mention the acquisition of a controlling stake in a company with a stronger brand value.