All-cash deal not a worry for Vodafone

After Vodafone’s board meeting and the subsequent mandate to its CEO, Arun Sarin, to make a bid for Hutch Essar, the stage seems set for a bidding war, with the largest global private telecom company and Reliance-ADAG as frontrunners.

With a market cap of over $160 billion, an all-stock deal for Hutch Essar will mean a dilution of around 10% for existing shareholders of Vodafone. Even at a phenomenal valuation of $18 billion for Hutch Essar, it’s not really that big a deal. Literally.

Now consider an all-cash option: Vodafone is miles and billions ahead of any competition. At the end of the last financial year, as of March 31, 2006, Vodafone had close to $4 billion on its books. Its operations also throw up a lot of cash during the year. During FY06,

it generated close to $6 billion of free cash, which it used partly to repay around $2 billion. To do an all-cash deal, Vodafone could count on existing cash from FY06, plus new internal generation in FY07 of around $14 billion. So while there’s nobody in the fray that can match the clout of Vodafone, will Arun Sarin bite the bullet?