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Vodafone Set For Indian Acquisition

T S VOD TMUS

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The world’s second largest telecom company, Vodafone Group Plc (VOD - Analyst Report) is making yet another move to establish itself in lucrative emerging markets. The company is reportedly in talks to buy Indian broadband and telecommunication company, Tata Teleservices Ltd. If the deal materializes, the telecom ace would edge out the country’s leading player – Bharti Airtel Ltd.

Vodafone enjoyed a subscriber base of more than 156 million in India as of Oct 2013, representing a market share of over 17%. Bharti Airtel’s customers totaled nearly 194 million as of the same period. With the Tata Teleservices takeover, Vodafone would add 63.5 million users to reach a total of 220 million, clearly outpacing Bharti Airtel.

However, the takeover process will involve a lot of ground work. Japan's NTT DoCoMo co-owns Tata Teleservices with the major shareholder Tata Group (owing 59.45%) and reserves the right to first buy Tata’s controlling stake in case it decides to exit the joint venture. In such an event, if DoCoMo does not exercise this right, Tata Group can induce DoCoMo to sell its stakes to a third party. Moreover, DoCoMo must meet certain performance parameters by Mar 2014. In case of any failure to meet these parameters, Tata can sell DoCoMo's shares to a third party or acquire it in the absence of a suitable buyer.

Vodafone has consistently proven it proactive approach to Indian operations. The company registered 16.5% growth in its revenues from India operations during the six months ended Sep 30, 2013. With increasing number of customers seeking data services, strong marketing campaign and flexible price plans, Vodafone expects continued growth in the sub continent. 

Last month, in a visit to India, CEO Vittorio Colao also highlighted the company’s $3 billion investment plan over the next two years for telecom infrastructural development in the country. Further, Vodafone is reportedly going solo in the country with the complete acquisition of its Indian joint venture, Vodafone India.

We believe the new rules set by Indian authorities in August to beef up foreign direct investment into the country has opened doors for multinational telcos like Vodafone for expanding in a big way and gain complete ownership in incumbent companies, which was previously capped at 74%. Further, new and easy policies in India related to spectrum, merger and acquisitions as well as auctions remain attractive for foreign telecom companies to invest in the prospective region.

Taking advantage of the new rule, Vodafone is aggressively trying to be the country’s numero uno carrier by acquiring smaller players. The company has already received approval from the Foreign Investment Promotion Board to acquire the remaining stake in Vodafone India for 10,000 Crore Rupees (approximately $1.61 billion), making the latter its wholly owned subsidiary.

Further, rating agency Fitch upgraded its outlook on the Indian telecom sector last year and highlighted industry consolidation, with large companies taking over smaller counterparts. We believe the Tata Teleservices buyout plan is in concurrence with this trend.

We believe the internal regulatory challenges within Tata Teleservices might impede Vodafone’s acquisition plan. However, Tata Group or NTT DoCoMo might be left with little scope to turn down the offer, if the bid is finally made. How far Vodafone would succeed in manipulating the decisions of these companies and advance with it plans will be clear in the coming days. Also, whether the new takeover will support financial growth goals at Vodafone is something to watch out for.

A similar consolidation scene is also prevalent in the U.S., which has seen mega mergers and acquisitions like Softbank Corp. acquiring Sprint Nextel and forming Sprint Corp. (S - Analyst Report). T-Mobile’s merger with MetroPCS Communications, resulting in T-Mobile US, Inc. (TMUS - Snapshot Report) and the pending acquisition of Leap Wireless International by AT&T Inc. (T - Analyst Report) are also taking  the U.S. telcom arena by storm.

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