Subba’s Serendipitous moments

February 13, 2007

Vodafone buys Hutch Essar — pays too much..?

Filed under: Business,India,Model — Subbaraman Iyer @ 9:14 pm

Was interviewed yesterday both on BBC and CNBC on the Vodafone’s acquisition of Hutch Essar. The questions asked were very similar, and here are my views:

For the record, Vodafone plonked $11 billion for the 67% stake in Hutch Essar. To keep that in context, Vodafone pays 9% of its market capitalisation acquiring the # 4 operator with 22 million subscribers.

Good deal..? It does not make sense to me..!

Vodafone paid $ 825 per subscriber when the annual average revenue per user (ARPU) is about $ 120 per year and an estimated churn rate of 27%. Vodafone would also have to pay for infrastructure enhancements with or without 3G. Incidentally when Cingular sold their stake in Idea Cellular in mid 2005, for $ 400 million, it worked out to $220 per subscriber.

Well, looks like Vodafone have not deviated from their practice of paying premium pricing.

Well, the Indian market is definitely sizzling with over 6 million subscribers being added each month. However the next 150 million subscribers are going to come from small towns and rural markets where the Average Revenue Per User (ARPU) is going to be lesser.

Well, for the other contenders Reliance especially it was a good game to lose.

But, guess Vodafone was faced with a Hobson’s choice. The management was under tremendous pressure to show growth and hence they have been looking at some of the emerging markets. Now, with this acquisition, the management has some breathing time. How long, is the billion dollar question!!

How such a premium acquisition translate into earnings is something that I haven’t figured out yet..!

Making the acquisition was easy. The tough part begins now.

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