For Vodafone, romancing with the Indian telecom market as a late entrant has proved to be an expensive affair. The 100% acquisition of the company is set to cost Vodafone $16.1-11.1 billion it paid to Hutch in 2007 for a 67% stake and now $5 billion to the Essar group for a 33% stake.
In October, 2010, the income tax department sent a $2.5-billion demand notice to Vodafone for its failure to deduct tax as required before making payment to Hutch in 2007. If realised, this will increase the cost of acquisition to $18.6 billion.
Then in May last year, the group slashed the estimated valuation of its Indian arm Vodafone Essar by $3.2 billion, following an industry price war and higher spectrum charges for mobile services.
Compared to Idea and Reliance Communications — both with a market cap of below $5 billion as on Thursday — the cost of acquisition appears to be very high. “Even if you give a premium of 30% to Vodafone over Idea (which has a subscriber base of 87 mn ) because of its higher subscriber base, the whole deal looks to be very expensive,” said an industry analyst.
Termed as a “jewel” by CEO Vittorio Colao in January, 2010, Vodafone’s India operation is losing its sheen.
Vodafone Essar’s subscriber base in India increased from 2.92 crore to about 13 crore over this period as it rose to become the third-largest operator in mobile services.
However, there was a fierce price war initiated by the new entrants in GSM such as Reliance Communications and Tata Teleservices. On May 31, the company paid a fee of Rs 11,618 crore to the government for acquiring 3G spectrum. Vodafone was the second-largest bidder after Bharti Airtel.
When Vodafone bought a stake in Hutch Essar, the cellular industry body was lobbying for free spectrum to incumbent players. No one had imagined the industry might have to pay to pay R 67,719 crore for four slots of 3G spectrum.
Vodafone will also have to pay a one-time charge for the excess spectrum they had been using.