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Industrial Products India, Industrial Manufacturers & Suppliers
 




 
   
 
 
 

Vodafone-Piramal Group deal ....

Vodafone-Piramal Group deal implies '07 valuation in '13

Three years after a peak, a trough and a plateau, Vodafone finds itself where it had started. In a transaction with the Piramal Group announced on Wednesday, the global telecom major has parted with a share of its Indian business, at a discount to the original valuation at which it had entered India in 2007, but with a promise to cash out the buyer at close to its original purchase price after two years.
The exit route options are either an initial public offer or a put (sell) option for the Piramal Group that bought 5.5% in the Indian arm for $640 million, implying a valuation of $11.6 billion.
Vodafone has assured an exit at around $900 million - implying a valuation of $16 billion - in two years either by repurchase, a sale to a third party, or initial public offer. The $900 million has not been publicly announced, but Piramal officials said they expected 17-20% return, which would yield a figure of around $900 million.
While most analysts do not correlate the current sale price of Vodafone India shares to the value of its competitors, the exit valuation implies that the UK parent of the company is expecting a $16-billion valuation for a possible IPO in two years. The valuations of its listed competitors, Bharti Airtel and Idea Cellular, are also considerably below the 2007 levels, and improvement, if at all, will be slow.
In 2007, the UK-based mobile service operator bought a majority stake in India's second-largest telecom player for $11 billion, along with an agreement to buy the rest of the company for an additional $5 billion. The repurchase agreement with Piramal mirrors the enterprise value of $16 billion.
 India's mobile subscriber base has since risen to over 800 million, from around 150 million in 2007; but due to increased competition, burgeoning debt levels and the recent 2G scam, large telecom companies trade at a discount to their 2007 levels.
The current Vodafone transaction suggests that not much is likely to change for these companies for at least a couple of years, said an analyst with an MNC brokerage, asking not to be named. He said, cost of borrowing for these companies is rising and the business environment is dependent on a new telecom policy that is still awaited.
"This is what Vodafone would have factored and assumed that business should at least be static for the next couple of years."
Buyers, who are already skittish on telecom investments in India, will also now push for better (ie: lower) valuation on the back of the Vodafone deal, said an investment banker who handles merger and acquisitions at a global bank.
Most Indian telecom companies have toyed with the idea of selling shares to reduce debt and corresponding interest costs that are affecting cash flows. The most prominent of them is Reliance Communications that last year entered into talks with more than one potential buyer to sell up to 26%.
Analysts said, deals like that are likely at distressed valuations now or could get postponed for at least three years when advantages of third generation, or 3G, services will become evident. Private sector operators paid a handsome 51,000 crore for 3G spectrum last year, but so far its benefit to earnings has not been evident. According to some, the Vodafone deal is not a benchmark.
A note to investors by Batlivala & Karani Securities, India, said: "Even though the trailing valuations of Vodafone Essar appear to be valued at a discount, we do not feel that the valuation of VEL (Vodafone India) by Piramal should act as any benchmark, because the valuation was done in 2007 and it is not right to equate it to the current situation in the Indian telecom market, especially, when telcos have recently got re-rated after they have been able to take price hikes across their tariff plans."
In March, Vodafone and Essar exercised options to transfer all of Essar's 33% in India's third-largest mobile services operator by subscribers to Vodafone for $5.46 billion. At the end of the transaction, Vodafone was expected to cross the limit on foreign holding in a telecom company by 1%, forcing it to divest at least that much to a domestic partner.
This sale is seen largely as a transaction under duress that the UK-based company has completed to comply with Indian regulations ahead of its battle with the Indian tax department in the Supreme Court later this year. The taxman has imposed a charge of $2 billion on Vodafone, stating that the company was liable to withhold tax in its original purchase agreement with Hutchison in 2007.

Nonetheless, duress or otherwise, the business case that Vodafone seems to be building suggests slow growth for the sector for another two years. Investors await new telecom norms to endorse this view, said the analyst from the MNC brokerage quoted earlier.

 
     
 
   
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