Vodafone to List or Find a New Partner

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Mumbai, Apr 20: Vodafone, has drawn up an ambitious plan that entails huge investments and either getting a new Indian partner or an initial public offer, since it has hit the regulatory ceiling of owning up to 74 per cent of the company. In the last four years Vodafone has not made any returns on its India investments.

Vittorio Colao, the Chief Executive Officer of Vodafone Group stated that the company would be investing “anywhere between £500 million and £1 billion (i.e. Rs 3,625-Rs 7,250 crore)" in 3G services in 2011.

Colao said that 2011 would be critical for Vodafone"s evolution in India. He said that the company expects to complete the purchase of Essar's stake in its joint venture in six months.

Vodafone Essar is the JV between Vodafone and Essar, where the former holds 67 per cent controlling interest while Essar holds the residual 33 per cent.

The CEO of Vodafone expects that contribution from data services will increase to 26-30% from current 5%.

To facilitate in this direction, Vodafone is actively trying to reduce the price of 3G-enabled smartphones. 

Smartphones available in the market approximately costs around Rs 4,000 and Vodafone is trying to reduce this cost to Rs 2,250. It has already initiated talks with Chinese handset makers for devices at such cost.

On the IPO plans, Colao said "We can see a future of different ownership structure and will consider around the end of the year whether we would be listing the company."

"We still have Analjit Singh as local partner and will consider the listing. I do not know when the listing will take place, but it will bring in another phase of maturity into the company," said Colao.

Vodafone directly holds 42 per cent in the telecom business. The rest is held by Indian shareholders Analjit Singh and IDFC. Last year, the company took impairment on the asset value of its Indian business by $2.3 billion (Rs 10,258 crore). But since then, Vodafone"s business has improved in India, and in 2010, it became cash positive.

The only concern for Colao in his India experience has been that even before it could make any profit the Indian tax department had slapped a Rs 11,218-crore case, claiming capital gains on Vodafone for its 2007 transaction.

“Going after the buyer just because he is around is like slapping the wrong child to punish others. That"s not a good indication of the (taxation) principle and I am hopeful the judiciary will look at it as a wrong methodology test case," he said.

On a possible compromise with the tax authorities, Colao remained diplomatic as he stated “Settlement is a speculation. The moment there is a phone call from New Delhi, I will take it, if there is any."

He made no comments on the strained relationship with Essar but praised their negotiating skills.

"They are very good with money. If they had thought that the fair market value of their stake is higher than the underwritten put option value agreed to four years ago, then they would have opted for that mechanism," he said.

In the previous month, Essar exercised its underwritten put option for its 22 per cent stake for $3.8 billion, which Vodafone claims gives them the right to exercise the call for the residual 11 per cent as well.

Even as Colao said that he did not think there should be any problem with the Reserve Bank of India (RBI) while buying out Essar from the venture. Although Most legal experts opined that based on Indian rules, RBI could raise objections to the structuring of the call and put option as the value of the shares held by Essar is in its overseas entity, Essar Communication Mauritius. This is held at a 50% premium when compared to the value is held in the onshore entity, Essar Telecommunications Holdings. Therefore, experts believe that Vodafone will have to fork out an additional $700 million (Rs 3,122 crore).

The CEO said he was “not particularly concerned" about the matter and would be happy if Essar or any Indian regulator asked for a fair market valuation exercise to value the joint venture. 

In either case, he rules out that the total payout would exceed $5 billion which has been taken into consideration. 

On the policy front, Colao had four suggestions to the government on telecom policy — auction of spectrum including 2G, in bulk irrespective of circles; stop discriminating between CDMA and GSM technology; let market forces trigger consolidation and do not put a cap on the number of players per circle or on their market share.

On the issue of consolidation policy, Colao said “India needs a phase of free consolidation. After which, one can have a rethink."

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