Vodafone plans India expansion - dumping Bharti Airtel

Vodafone is set to launch a £7bn plus offer for the Indian mobile phone operator Hutchison Essar as the company prepares to fight off rival bids for India's fourth largest telecoms carrier.

According to reports in London newspapers Arun Sarin, Vodafone chief executive, discussed the company's plans at a recent board meeting. He is understood to have won backing for a plan to switch out of its 10 per cent stake in Bharti Airtel and pursue a majority stake in Hutchison Essar.

Vodafone would not comment on the situation but it is understood that the British mobile phone company will detail its intentions in one of the world's fastest growing mobile markets over the coming days. Its executives are due to meet Hutchison's managing director, Canning Fok, and Essar's Ravi Ruia in London shortly.

Analysts said a bid valuing the Indian operator at around £7bn was high but could be justified. Such a deal would value Hutchison Essar at over 20 times its expected earnings in the year to March 2007, representing a much richer valuation than the market leader Bharti which trades at around 16 times expected profits.

Vodafone will almost certainly face competition for Hutchison Essar, with India's second largest mobile telecoms company Reliance Communications expected to bid. Egyptian operator Orascom Telecom and Malaysia's Maxis are also thought to be interested in the company while Bharti Airtel has yet to rule out a bid.

Reliance presents the biggest hurdle for Vodafone as the Indian company wants to bolster its GSM network. Nick Jotischky, an analyst at Business Monitor International, said an acquisition of Hutchison Essar presents Reliance, originally a CDMA only player, with an opportunity to boost its GSM presence. He said that such a merger would create a clear market leader with a market share of about 36 per cent but is unlikely to be blocked by regulators due to the fragmented nature of the Indian telecoms market. The top four players in the Indian market account for only 70 per cent of the total growth and only three of those companies offer national coverage. India is divided into 23 circles with separate licenses in each area and a slew of small regional local companies are yet to be consolidated. Hutchison operates in around 16 of the circles.

If Vodafone succeeds in buying the Hutchison Essar business, it would be its largest acquisition since the dotcom days when Chris Gent built a global mobile telecoms empire through a series of expensive acquisitions. Over the past year, Vodafone has been withdrawing from mature western European markets and refocusing its attention on emerging markets. It has spent around £3.3bn on acquisitions in Turkey, Africa, Egypt and Central Europe over the past 12 months. It also sold its troubled Japanese division for £8.9bn.

India represents one of the most attractive growth markets for telecoms companies alongside China. The number of mobile subscribers is expected to continue growing at a rapid rate as the device becomes the main communication tool for hundreds of millions of people who have no access to fixed line phones and cannot afford computers. The surge in predominantly prepay users in India can be attributed to the availability of extremely cheap GSM based mobile phones. Informa Telecoms & Media analyst Mark Newman said that in 2007 India is forecast to add over 66 million new users compared to around 68 million in China.

Mr Jotischky said that the number of Indian people with a mobile phone is expected to almost double; in 2006 to 148.1 millions subscribers. More than six million Indians are taking up mobile phone services a month, but the penetration rate is expected to remain low at 13.4 per cent.

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