Vodafone chief executive Arun Sarin may have mustered board approval for a bold bid to get mobile service firm Hutchison Essar, but he faces daunting questions from leading analysts on the price he could pay.
The message for him: Watch your step and don't bite off more than you can chew.
JP Morgan and Goldman Sachs, representing key investors, have warned Europe's largest telecommunications company not to get overambitious to get the 67 per cent majority held by Hutchison Telecom International Ltd, as a bidding war might breach its published criteria for mergers and acquisitions.
"Continued involvement in Hutchison Essar might threaten merger and acquisition criteria. In the long term, failure to secure Hutchison Essar could raise questions about Vodafone's ability to build a larger emerging market footprint and hence the direction of group strategy."
It has pointed that if Vodafone were to drop out of the bidding, its budgetary discipline would be rightly applauded in the near term with investors attracted back to the stock.
Hutchison Whampoa, the HongKong group that controls the majority in Hutch, has clearly said that it will entertain only bids "well in excess" of $14 billion for 67 per cent. That means an enterprise value of $22.8 billion.
Analysts noted on Wednesday that Vodafone had exceeded expectations in restructuring Telsim, the Turkish telecoms operator it acquired last May and also pointed out the Essar group's right to buy first the 67 per cent it does not control in Hutchison Essar does not cover Vodafone because Essar's right is limited to Indian competitors such as Reliance Communications.
Those factors are positive, but there remain pitfalls.
"In practice, Vodafone would want a constructive relationship with Essar given the scope for disruption in the day-to-day running of Hutch Essar, so Essar's position seems strong," says the JP Morgan report.
The report also suggests that Bharti Airtel, Hutch's rival, may prefer Vodafone as its rival to prevent Reliance from becoming a clear number one.
"Exactly where the preference lies could materially impact Vodafone's exit multiple," Morgan said.
Goldman Sachs said Vodafone could align with Essar, which is an influential position because Indian regulations do not allow a domestic operator to have more than 10 per cent in two operations in the same circle.
"It will improve its chances of success in our view," Goldman said.