India is still shining for Vodafone Group Plc despite regulatory uncertainties, pending tax issues and a fiercely competitive sector. The world’s largest mobile operator by revenue has begun the year on a bold note, backing the initial public offer (IPO) plans of its Indian unit and sources say the ball has already been set rolling.
As the first concrete step, Vodafone India has roped in investment bank NM Rothschild to assist in its listing plans. This unique ‘IPO advisory’ mandate is already raising eyebrows in the investment banking fraternity. Last December, the company had taken baby steps by organising a global investors’ and analysts’ meet in Mumbai, a first of its kind in India, where it disclosed financials and other operational details and even highlighted potential regulatory risks.
If that meet was seen a precursor to the local listing, then later that month, Vodafone India’s chief executive, Martin Pieters, also made an internal announcement to his local team, updating them of the parent’s go-ahead. Roping in an “advisor” to help is being seen as a pro-active step towards firming up capital-raising plans and reaffirming the India commitment.
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India is currently one of the largest operations for the Vodafone Group worldwide. It also has the highest number of subscribers, nearly 146 million.
The Vodafone Group entered India in 2007, after buying out Hutchison’s 67 per cent stake in its telecom venture with Essar for $11.2 billion. Last year, it also bought out Essar’s 33 per cent stake from the turbulent four-year JV $5.4 billion. That transaction would have taken Vodafone’s ownership in the venture to 75.35 per cent, more than the prescribed Foreign Direct Investment (FDI) limit of 74 per cent. So, last August, Piramal Healthcare picked up a strategic 5.5 per cent in the venture for $640 million. The Piramal investment helped Vodafone meet regulatory requirements.
When asked about Rothschild’s appointment, a Vodafone India spokesperson told Business Standard, “It is already known that we are preparing ourselves for a potential IPO in the future. It is premature to comment on any such speculation at this point in time."
Rothschild’s mandate, according to sources aware of these developments, will be to assist the company chart the regulatory waters, help in price discovery and valuation, restructure its complicated shareholding and even help appoint the bookrunners at a later stage.
“It’s the first listing for a big MNC like Vodafone. Naturally, they would want external help to carry them through the many regulatory and compliance issues. They have a small team here and as a bank Rothschild has the telecom sector and regulatory expertise, having last worked very closely with the government as its advisor for the 3G auctions,” said an official on condition of anonymity.
Typically, most investment banks do not offer separate IPO or capital-raising advisory services. Companies, especially in India, also appoint investment banks principally as bookrunners for an issue. The bookrunners' job is to sell an issue to investors and also manage the final listing process.
But, Rothschild has been specialising in such mandates in the West, where it works with a company’s board and strategises on various capital-raising structures like IPOs or rights issues. “The bookrunners are often conflicted. Their interests are not necessarily always aligned to a company’s management the way it is with investors. Additionally, post its alliance with ABN Amro, Rothschild does not have equity capital market operations in India. This gives them an opportunity to pick up these advisory roles, which most other banks cannot,” said an analyst aware of the development.
So far, such mandates have been few and far between for Rothschild in India. It had successfully carried out such advisory mandates during the Cairn India and ENIL (Radio Mirchi) IPOs. But, Essar Energy and Air Deccan had turned it down.
Though Vodafone has not offered a timeline, analysts predict an early 2013 listing, provided the volatility in global capital markets eases. However, according to stock market regulator Sebi’s website, Vodafone (India’s second largest player by subscribers after Bharti Airtel) has not filed any documents yet.
It’s also early days to talk about the quantum of funds and the valuations. In last year’s Piramal deal, Vodafone India was valued at $11.6 billion, much lower than the $16 billion the company fetched five years ago, when Vodafone first came in.
Fierce competition and price wars have been affecting the profitability of most telcos, including Vodafone. In 2010, the Vodafone Group had to book a nearly Rs 10,258 crore impairment charge on its Indian operations.
The company has turned cash positive in 2010. Since then, things have improved (see chart). For the six months ended September 30, its revenues were up 13 per cent from a year earlier, while the Ebitda went up 9.7 per cent. The operating free cash flow stood at $519 million at the end of September.
But, regulatory challenges continue. Last November, its Mumbai and Delhi offices were searched for alleged irregularities in the allocation of additional bandwidth between 2001 and 2003. Vodafone has denied any wrongdoing. The final ruling on its $2.5-billion tax case is also expected in the near future.