Vodafone in India - The rough road ahead

Background

Vodafone, already the world's largest cellular carrier, is getting control of India's fourth-largest operator with about 24 million customers and 16.4 percent of the market. Vodafone says its target now is to garner between 20-percent and 25-percent market share by 2012. Assuming all needed regulatory approvals, the deal is expected to close in the second quarter. Hutch-Essar becomes Vodafone's third largest unit, following its German operations and its 45-percent minority stake in Verizon Wireless in the United States. However, the German and U.S. markets are mostly saturated - 80 percent in Germany and 76 percent in the United States - while the Indian market is only 15-percent penetrated, and it's the world's fastest-growing cellular market right now, with a reported 6.5 million new subscribers per month.

The immediate issues

Vodafone's acquisition of Hutchison's share of Hutch-Essar also comes with certain complications that vodafone has to deal with. The first is the Indian law that prohibits foreign entities from holding more than 74 percent of an Indian telecom company. In terms of the foreign-ownership limits, Vodafone reportedly has deals set up to cover that issue as well. Hutchison Telecom had local partners that, between them, hold a 15-percent interest in Hutch-Essar. Those partners have agreed to retain their holdings, Vodafone says, leaving Vodafone's interest at 52 percent after the deal is completed, just enough for it to have full operational control over the operator plus leaving enough leeway for it to buy the 33-percent Essar stake. Vodafone offered to buy out Essar's stake, paying the same price it paid Hutchison. According to Vodafone, if Essar accepts its buyout offer, it already has local minority partners lined up and willing to buy as much as 26 percent of the company.

The second is its 10-percent stake in rival celco Bharti Airtel, an ownership position that came with a noncompete agreement when it bought that stake for $1.5 billion in 2005. Vodafone said Bharti has agreed buy the 5.6 percent of that stake that represents direct control, with Vodafone keeping a 4.4-percent indirect stake as an investment but having no management or operations position in the carrier. It appears Vodafone comes out smelling like a rose in the deal - Bharti is going to pay it $1.6 billion, so Vodafone both shows a little profit on its original investment and has the 4.4-percent stake almost as a free gift. Vodafone seems to have granted deferred payment terms for the 5.6% stake over the next 18 months. This leaves Voda with an indirect stake of 4.4% worth around US$1.3bn based upon an initial investment of US$0.8bn for the whole of the 10% stake. In addition, Vodafone announced an agreement with Bharti to share network infrastructure in India to cut costs. As part of this transaction, Voda has immediately allayed fear about the capital costs of roll-out of rural GSM in India. It seems that the #3 (Hutch Essar) and #1 (Bharti) will share infrastructure and which will make the investment look at lot more attractive than rolling out infrastructure solo. This potentially gives this partnership a huge advantage over the #1 CDMA operator, Reliance, and the state owned #2, BSNL and MTNL, in the GSM market.

Vodafone's immediate strategy will focus on -

improving the market performance at Hutch Essar: the Vodafone targets a market share (presumably by revenue) of 25% by FY2012

Rolling out the Voda brand and services

Rolling out the network to the 6 circles where there is currently no service.

In the medium to long term, Vodafone will strategise to look at acquiring some of the smaller Indian GSM players to gain market share. Ultimately, the aim must be to be #1 in the market.

Vodafone Group will invest $2 billion in India in the next few years. "I think there will be consolidation in the India market in the near term," Vodafone CEO Mr. Sarin said. "India will be the biggest country for Vodafone in terms of number of subscribers," he said, adding the company will reach a subscriber base of 100 million in the country in the next few years. Sarin didn't specify when he would hit the 100 million target, but said he will achieve faster subscriber growth and a higher subscriber base as a result of roll out in newer circles, or service areas. The companies strategy will be to roll out new services so that the ARPUs increase over next few years (though this remains a very challenging task). The ARPU boost can come from introduction of new services, such as mobile banking in India. On Monday Vodafone announced it would work with Citigroup to develop M-PESA, a mobile phone money transfer application across the world. Sarin pointed out that in many emerging markets - such as India and Africa - mobile phones provide the only way to transact with a bank.