Vodafone has got a regulatory breather with the government allowing 100 per cent foreign direct investment (FDI) in the telecom sector, say analysts.
The British telecom company entered India six years ago, paying a premium 16 times the pre-tax profit of Hutchinson. It remained a partner of the Essar group, which, too, sold off its 33 per cent stake two years ago for $5 billion (Rs 29,640 crore today) in cash.
As the FDI rules restricted Vodafone from holding more than 74 per cent, it roped in the Piramal group, which bought an 11 per cent stake in 2012 for Rs 6,000 crore. The cash-rich Piramal group had plans to exit in 12-15 months, with or without an initial public offering of the company. But recently, the company said it would look at an exit in another year. It had been promised an average return of around 20 per cent for this.
While neither of these companies responded to questionnaires on the timeline for the investment exit, analysts say Vodafone now has a lot of options of value creation, beyond public share sale. "They could just go the Hindustan Lever
way and do a royalty issue, hike their stake and take a bigger pie of the entity back to the UK," says Alok Shende, principal analyst and co-founder of Ascentius Consulting.
The company had been planning an IPO ever since Essar exited. But many factors like a dull equity market, telecom regulatory overhang in the form of fines slapped over 3G roaming issue and lack of clarity on the renewal of some of their licences had been playing spoilsport. This was is in addition to the constant sword of a Rs 14,000 crore billion retrospective tax claim on the parent company.
"This will give Vodafone flexibility to capitalise, without depending on shareholders just to meet a regulatory norm. They might choose to exercise the option immediately or later, but it is a clear option," said Mritunjay Kapur, India head of Protiviti Consulting.
Vodafone has also been investing in new business areas, be it 3G spectrum or the enterprise business areas. This makes the already capital-intensive business investment heavy. Kapur believes should the equity markets remain under pressure, Vodafone will get more time to wait and watch for an IPO. "If they need funds, they can invest directly or buy out the Indian promoters," he said.
Vodafone already has a first right to buy back the stake from the Piramal group. This is a part of the deal between the two companies during the investment. This purchase might make Vodafone spend yet again over an Indian partnership, if Piramal exit does not happen through an IPO. This would be the third round of investment it would be making from its pockets, as opposed to earning via a public share sale.
"Even if a premium is paid, it would have already been accounted for financially. Vodafone is flush with funds and has been doing acquisitions internationally," said Shende.
Vodafone recently agreed to buy German cable company Kabel Deutschland for a valuation of $10.1 billion.