Less bad

Vodafone's India bet starts to look less bad

Vodafone's Indian bet is starting to look less bad. The British telecom operator is set to take full control of its subsidiary in the country amid a relaxation of foreign ownership rules and hopes that the sector is finally turning a corner. The indicated price for the 15.5 per cent that Vodafone doesn't already own implies a value for the business of $10.6 billion. If only its earlier Indian investments had been as astute.

The $1.65 billion price Vodafone submitted to India's Foreign Investment Promotion Board values the entire unit at just 5.4 times its Ebitda for the year that ended in March 2013. Bharti Airtel and Idea Cellular, its two biggest rivals, trade on an average trailing multiple of 8.5 times.

The final step in Vodafone's six-year battle to take control of India's second-largest mobile operator by revenue looks set to be the cheapest. When Vodafone first bought a 67 per cent stake in what was then called Hutchison Essar in 2007 it valued the entire business at $16.4 billion. In 2011, when Vodafone exercised an option to buy the remaining shares from the Essar conglomerate, the implied value for the whole business was $15.2 billion. After that deal, Indian health care group Piramal Enterprises ended up with an 11 per cent stake to keep Vodafone within foreign investment limits, while another group of investors held 4.5 per cent.

The reason Vodafone's latest deal looks attractive is because the bulk of the price was set two years ago when the Indian telecom market was in terrible shape after a 2008 auction of spectrum left the market with too many players. A court order last year revoked permits from several smaller operators. The hope is that new M&A rules will help to reduce the number of players in the industry to around six or eight - from around 12 today - within the next four years.

Applying the same multiple of Ebitda as its peers suggests Vodafone India's enterprise value is about $16.9 billion. That is still less than its parent company's total investment, including debt. Vodafone is also still awaiting a final outcome to its $2 billion long-running tax dispute with the Indian government. But the latest deal offers a glimmer of hope that its Indian excursion will eventually prove to be worthwhile.