It's about time Vodafone released from the takeover purgatory
The scariest words for UK stock investors may well be “Vodafone Plans Massive Deal”. In the past decade, Vodafone Group, the world’s largest mobile-telecommunications company, has spent billions on acquisitions.
By Agencies |
LONDON: The scariest words for UK stock investors may well be ���Vodafone Plans Massive Deal���. In the past decade, Vodafone Group, the world���s largest mobile-telecommunications company, has spent billions on acquisitions.
Shareholder wealth was destroyed on an epic scale. Now Vodafone is intent on sealing its biggest deal in years: the takeover of Hutchison Essar. Plenty of investors will feel nervous about that. Their pockets have been fleeced too often in the past. Yet they should allow this deal to go ahead ��� providing that Vodafone keeps its tendency to overpay under control.
Vodafone has spent long enough in takeover purgatory. The Newbury, England-based company has learned its lesson. It���s time to do deals again. ���At anything up to a price of $20 billion, then Essar would be positive for Vodafone,��� Cyrus Mewawalla, head of telecommunications research at Westhall Capital in London, said in a telephone interview. ���India is a great market to be in. It has tremendous demographics, and the economy is growing by 8-10% a year.���
There���s little doubt that Vodafone will do its best to buy the company. Chief executive officer Arun Sarin said last week that Vodafone will bid for Hutchison Essar ���within days, weeks��� and will be ���highly price-disciplined���. It is a valuable prize, probably the most attractive telecommunications operator on the market this year.
Essar had 23.3 million customers in the world���s fastest-growing mobile-phone market at the end of last year. Vodafone���s global expertise should help improve Essar���s performance, allowing the Indian company to expand sales. That would reduce Vodafone���s dependence on the mature, slowing markets of Western Europe. The $16-20 billion price tag that Hutchison Essar may carry is considerable, yet India is appealing enough to make it worthwhile.
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So what could hold Vodafone back? Its track record. Vodafone has one of the worst takeover histories in the world. The $175 billion that it paid for Germany���s Mannesmann remains the biggest acquisition ever in Europe. Look at the 50 largest deals of all time, and Vodafone was the acquirer in three of them. Few companies have spent so much in a short space of time ��� at least $300 billion in total. Indeed, in 2004, when the company was reported to be contemplating a bid for Sprint together with its US partner, Verizon Communications, Vodafone���s shares fell as much as 4.6%. Mr Sarin has had a rough ride from investors, who suspect he is intent upon returning to the bad old ways of his predecessor, Christopher Gent. Last year, almost 10% of the shareholders voted against Mr Sarin���s re-election as CEO. That is all in the past. Vodafone should now be getting back on the acquisition trail.
First, the company needs to position itself in emerging markets. It has already bought a stake in a Turkish mobile operator, and India is the next obvious place to go. That���s where the growth is ��� after all, in Western Europe just about everyone who wants a mobile phone already has one.
Vodafone can���t permanently exclude itself from expanding markets without turning itself into a dull, declining utility. The best way into those economies is through acquisitions. Its operational performance has improved. In the past, it spent billions on big deals while stumbling in the markets it was already in. It now has 200 million subscribers worldwide, and the number is growing. Competition is still fierce, and internet technologies could easily cut into Vodafone���s market share. Yet nobody will accuse the company of ignoring its core business while making big acquisitions.
The strategy of focusing on shareholder returns is starting to pay off. From a peak of 399 pence in 2000, Vodafone shares plummeted to 80 pence in 2002 ��� a measure of how little value all those huge deals created. From 110 pence in August 2006, the stock has now risen to about 150 pence. Shareholders are starting to trust the management again.
In turn, that gives the people running the business more freedom to do deals. Finally, Vodafone vastly overestimated the importance of size. Being global isn���t crucial. It is certainly possible for niche, national operators to do well. That said, having spent so much money establishing a global presence, it would be foolish to surrender it now. It confers some advantages and it is important not to throw that away. Without any acquisitions, however, Vodafone would be getting smaller.
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Shareholders have paid a heavy price for Vodafone���s past acquisitions. That doesn���t mean the company should never do a deal again. At the right price, an Indian takeover will be a good move for Vodafone.
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