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Wednesday, December 20, 2006

Vodafone Deja-Vu

Back in late 2003, Vodafone looked at swapping a minority in the market leading cellular operator in the US for complete ownership of the #3 operator. Three years on and if the rumours are correct Vodafone are thinking about doing the same in India.

Vodafone currently owns 10% of the market leader, Bharti Airtel. It appears that the Hutchison 67% stake in the #3 Operator, Hutchison Essar is up for sale. India is currently the fastest growing cellular market in the world and therefore the Hutchison stake is tempting for local players, international operators and financial institutions. It will be sold for an extremely high premium.

The negotiations will be extremely delicate as Vodafone has to convince the local Indian partner Essar that it is a worthy partner and has to make a graceful exit from the Bharti venture. Both Essar and Bharti have pre-emption rights on the respective stakes.

I actually believe that theoretically Vodafone should buy the Hutchison stake, given the normal caveats about price. It is much better to own 67% of the #3 player than 10% of the #1 with little chance of increasing this in the medium term. In fact, I don’t believe the gap is impossible to bridge especially given the growth remaining in India and the fact that the networks are still being built out.

The situation as it played out in the US was that the #2 player (Cingular) ended up buying the #3 player (AT&T) making it the #1 player but with large technological challenges to overcome. Since then financial institutions have been on the Vodafone case about selling up and exiting Verizon Wireless. The same outcome could occur in India with Reliance buying the Hutchison Essar stake and facing large technological challenges to overcome. In this scenario, Vodafone will remain in the #2 player (Bharti Airtel) which despite huge growth the financial institutions will be asking Vodafone to exit.

Vodafone needs to tread extremely carefully.