Win in Telsim auction hurts Vodafone stock

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Vodafone won the auction for Turkey’s second largest mobile phone operator on Tuesday, saying the $4.55bn deal would dilute its earnings for up to five years but raise its longer-term growth profile.

The news came a month after a warning on falling profit margins hit shares in the UK group by nearly 11 per cent. On Tuesday, they fell another 4p to 124½p as the price paid for the assets of Telsim took investors and analysts by surprise. Some bankers had warned earlier that any price over $3bn would be seen as an overpayment.

Vodafone moved into one of the few European telecommunications markets with substantial growth potential, beating four Middle Eastern operators – MTC, Etisalat, Orascom and Emaar – and Russia’s Sistema. Vodafone made the highest sealed bid and then won the short second round bidding process at a televised auction. The reserve price was $2.8bn.

Arun Sarin, Vodafone’s chief executive, said the Turkish mobile telecoms market represented “a major growth opportunity”. Turkey was Europe’s second most populous country after Germany, he said, and there were just 53 mobile phones per 100 people, compared with penetration rates of 101 per cent in the UK or 85 per cent in Germany.

Telsim had revenues of just $712m in 2004 and earnings before interest, tax, depreciation and amortisation of $87m, but Vodafone said the acquisition price would equate to less than five times ebitda within five years. Vodafone, which will also invest more than $1bn to make up for past under-investment in customer service and Telsim’s network, said the Turkish company would make net losses “in the short to medium term”.

Analysts in Istanbul said Vodafone’s arrival in the Turkish market would boost competition and pose a challenge for Turkcell, the dominant operator with an estimated two thirds of the market. The task facing Vodafone is considerable, however, as Turkcell has 25.6m customers, three times as many as Telsim’s 8.2m.

Turkcell’s shares fell nearly 7 per cent on the Istanbul stock market, which closed 1.2 per cent lower on Tuesday.

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