January 28, 2007 10:26 pm

Vodafone looking to Essar for big savings

Vodafone is eyeing opportunities for big savings in capital expenditure if it wins the takeover battle for Hutchison Essar, India’s fourth-biggest mobile operator.

Vodafone, the world’s biggest mobile group by revenue, is looking at sharing network infrastructure with rivals in India, which would achieve big reductions in capital spending.

With the bidding war for Hutchison Essar pushing its enterprise value to as much as $20bn, Vodafone could struggle to meet its self-imposed financial targets on deals. But savings in capital spending could enable it to hit those targets and ensure its management does not provoke a new rift with investors.

Arun Sarin, Vodafone’s chief executive, raised the issue of sharing network infrastructure with Indian officials during a trip to the country this month, said people familiar with the talks. Vodafone declined to comment. The government and regulators are considering relaxing rules on network sharing to improve services outside cities and towns.

Bharti Airtel, India’s biggest mobile operator, has held discussions with Vodafone about network sharing. Vodafone has a 10 per cent stake in Bharti Airtel, which also declined to comment.

Vodafone is keen to make acquisitions in emerging markets because it is contending with slowing revenue growth in its core European businesses.

But in 2005 some Vodafone investors accused it of overpaying for Telsim, Turkey’s second- biggest mobile operator, which it bought for $4.6bn. Investors were also alarmed by Vodafone’s failed $38bn offer for AT&T Wireless, the US mobile operator, in 2004.

Vodafone attempted to placate investors in May last year by publishing financial criteria for future acquisitions. The most onerous target is that the return on invested capital should exceed the local risk-adjusted cost of capital in three to five years.

A Financial Times analysis of five forecasts for Hutchison Essar by analysts shows how Vodafone could struggle to meet the target. Assuming an enterprise value of $20bn for Hutchison Essar, which is at the top end of expectations, on a deal closing at the end of 2007, the average of the forecasts suggests Vodafone’s return on invested capital after tax would be 8 per cent in 2012. According to the FT analysis, the local weight-adjusted cost of capital would be about 9 per cent.

However, a 20 per cent saving in capital expenditure would increase the return on invested capital to 9 per cent in 2012. A 30 per cent saving would increase it to 9.5 per cent and therefore exceed the local cost of capital.

Vodafone announced its first initiative on network sharing in November. In Spain Vodafone and Orange agreed to share 5,000 base stations, the transceivers that are the most expensive equipment in any network. Vodafone said the deals would reduce the base stations that it needed by 40 per cent.

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