UK-based Vodafone Group's Indian operation, which was once termed as a "jewel" by its CEO Vittorio Colao seems to have lost its sheen.
“India is the jewel of our international markets expansion,” said Colao at a business conference in New Delhi in 2009. “India needs more and more investment ... we continue and will continue to invest as we think the opportunity is here."
The company entered Indian market by buying majority stake of Hutchison Whampoa (now CK Hutchison) in Hutchison Essar in 2007 for $10.9 billion. Later it paid $5.5 billion to buy out Essar’s stake in Vodafone Essar.
It means that Vodafone Group has paid $16.4 billion for 100% equity in the company.It has also spent billions of dollars in buying Spectrum through various auctions.
Valuation of Vodafone’s stake in the new entity
If we go by the announcement made by the Vodafone and Idea, the valuation of Vodafone’s equity comes out to be $5.5 billion (Rs 35,897 crore).
We can take valuation of 4.9% tranche as basis for calculation of market capitalisation. If we go by deal value of Rs 3,874 crore for the 4.9 percent stake from Vodafone to Idea, the combined entity will have a market cap of Rs 79,061 crore. Vodafone will own 45.1 per cent equity in the new entity. Hence valuation of Vodafone’s shares is Rs 35,897 in the new entity.
What went wrong?
When Vodafone bought Hutchison’s stake, in 2007, it was supposed to be at a very high valuation. The enterprise valuationworked out at an estimated 16.4 times Ebitda of the unlisted Indian company, compared with the 13.6 times of the largest operator Bharti Airtel Ltd.
Arun Sarin, the then CEO of Vodafone justified his decision to buy Hutchison at a high price. “India is 13% penetrated, China is 40% penetrated. While India goes from 13% to 40%, China is going from 40% to 60% or 70%. There’s a lot of headroom here in terms of growth,” said Sarin in an interview justifying his decision.
What he couldn’t foresee was entry of new operators and hyper-competition in the market leading to low tariffs.
Price War, Spectrum auction and Vodafone writing off $ 3.2 billion from India entity in 2010
The first price war started in 2010 with Tata Teleservices and RCOM offering low tariff. Incumbents had to reduce tariff. Moreover, Vodafone paid more than Rs 11,000 crore for acquiring 3G spectrum.
This led to the Vodafone group slashing the estimated valuation of its Indian arm Vodafone Essar by $3.2 billion.
Interestingly, both Tata Teleservices and RCOM suffered most due to price war initiated by them and were reduced to insignificant players in long term.
Second round of price war initiated by Jio and ongoing investment on spectrum acquisition
In 2016, the company again announced that it had recorded a non cash impairment charge of $ 5.38 billion during first half of the fiscal ended September 30 in respect of its Indian unit.
“There are a wide range of potential outcomes which the group has had to assess to derive its current view of future business performance and cash flows for impairment valuation purposes. To the extent that future commercial outcomes are different to those assumed within our plan, this valuation may need to be revised,” said Vodafone on the impairment charges.
This clearly showed that India operation was not functioning as per initial expectations of Vodafone CEO. The company is not able to face the second round of price war alone.
Future of Vodafone
Let us hope merger is a new beginning for Vodafone in India and both its customers and share holders would get benefits of the scale of operations that a merger of two large operators provides.