British mobile company, Vodafone Group Plc (VOD) intends to purchase additional stake in Essar group, its Indian joint venture partner, for $5 billion in cash. The transaction is expected to be completed by November.
Vodafone will acquire Essar’s 33% stake in Vodafone Essar Limited, thereby obtaining a 75% stake in the Indian venture. However, foreign companies cannot own more than 74% stake in Indian companies. Thus, the British company might sell its additional 1% stake or may consider an IPO in future.
Vodafone had bought certain stakes of an Indian wireless operator in 2007 for $11 billion. The British company has been struggling and facing a lot of operational hurdles in the brutal competitive market since 2007. High spectrum costs, an ongoing dispute over tax and an increasingly difficult relationship with its main partner, Essar group, served as negative catalysts for Vodafone.
Vodafone is exposed to aggressive price competition in India, which has forced them to write down the value of its stake in Vodafone Essar. Additionally, the company took a charge of ???2.3 billion ($3.70 billion) in May 2010 due to intense competition and rising spectrum costs.
We believe the increased stake of Vodafone in the Indian joint venture will end this difficult situation and ensure smooth running of its operations.
Vodafone is expanding its business in emerging markets including India that gained the number two market position in terms of revenue. The move is a part of the company’s broader strategy to exit minority holdings that will enable it to focus particularly on Europe, Africa and India and will create more valuable business. The strategy will provide significant competitive edge over its major competitors Verizon Communications (VZ) and AT&T Inc. (T).
This new growth strategy is expected to generate organic service revenue growth in the range of 1% to 4% per annum and free cash flow in the range of £6.0 billion to £7.0 billion over the next three years (2011-2014). Over the same period, Vodafone expects EBITDA margin to stabilize, with continued cost efficiency, regional scale and improving margins in various markets including India.
We are currently maintaining our long-term Neutral rating on Vodafone. The company holds a Zacks #3 Rank, implying a short-term Hold rating.
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