Vodafone's IPO hinges on $8bn question
Vodafone India Ltd. (VOD) said it's "impossible" to proceed with a proposed initial share sale until the government clarifies the price to extend licenses that may amount to as much as $8 billion.
The fees that India's secondlargest mobile phone operator may have to pay could vary by 3 billion pounds ($4.8 billion) depending on how the government prices the permits, skewing the potential market value of the company, according to Chief Executive Officer Marten Pieters. The licenses are due for renewal from November 2014.
"It's impossible to float the company if you have that kind of swing in your valuation," Pieters, 59, said in an interview at Bloomberg's Mumbai office. "We'd get a discount for all this uncertainty. Why as an owner would you want to sell it with a big discount?"
The government's drive to boost airwave prices amid corruption alle- gations in awarding spectrum to some operators in 2008 may deter IPO investors, according to Naveen Kulkarni, an analyst at MF Global Sify Securities India Pvt. Mobilephone companies including Vodafone, which has more users in India than the population of Japan, and Bharti Airtel Ltd. (BHARTI) are struggling to revive growth in a market where 13 competitors have driven call rates to a penny a minute.
"We're still in a situation where regulatory uncertainty is the order of the day," said Lawrence Sugarman, an analyst at Liberum Capital Ltd. in London. "When you have that situation, and also such high reserve prices on the spectrum, the companies are going to be quite reluctant to invest."
India's cabinet decided Aug. 4 that operators will have to pay a minimum of 140 billion rupees ($2.5 billion) to buy wireless channels in the 1,800 megahertz band for the global system for mobile communications, or GSM, networks. That price is only 16 percent lower than the winning rate of high-speed third-generation airwaves in a 2010 auction, Mumbaibased Goldman Sachs Group Inc. analyst Sachin Salgaonkar wrote in a note to clients.
Bharti Airtel rose 2.5 percent to 308.85 rupees at 9:38 a.m. in Mumbai. The shares have dropped 22 percent in the past year making it the third-worst performing stock in the 73- company MSCI India Index (MXIN), which advanced 16 percent in the period. Reliance Communications Ltd. (RCOM), controlled by billionaire Anil Ambani, has lost 15 percent.
Vodafone's parent Vodafone Group Plc, which acquired Hutchison Whampoa Ltd. (13)'s business in the world's second-largest mobile-phone market in 2007 for $10.7 billion, is also waiting to resolve a $2.2 billion dispute with Indian tax authorities over the acquisition before selling shares, Chief Executive Officer Vittorio Colao said last year.
Pieters, who wants to sell shares "as soon as possible" doesn't need the IPO to finance the renewal of permits, which will be funded by Vodafone's shareholders, he said. The unit, based in Mumbai, has invested 510 billion rupees in spectrum and networks in the nation in the last five years, he said. The company has a net debt of 300 billion rupees, Pieters said.
An IPO "would give them a better relationship with the regulators and authorities if there was a tie-in to the Indian population," Liberum's Sugarman said. "It's good from a marketing perspective as well."
Vodafone has permits for 900 megahertz airwaves in Mumbai and New Delhi that come up for renewal. The company has an option to extend the licenses by 10 years.
Bharti Airtel, India's biggest mobile-phone operator, will also need to renew its licenses between November 2014 and 2024.
The government, which has said it plans to price renewal permits at rates determined at auctions, failed to attract bidders for four areas including Mumbai and Delhi at last week's Supreme Court-ordered sale of second-generation airwaves. India will attempt to offer the spectrum to companies again before March 31, Telecommunications Minister Kapil Sibal said on Nov. 16.
The Supreme Court earlier this year said spectrum must be auctioned rather than sold and canceled 122 licenses, saying their original allocation had been corrupted by "money power" and some buyers' "ability to manipulate the system."
India will ask the telecom regulator to revise the price for the frequencies unsold in last week's auction, a government official told reporters in New Delhi, asking not to be identified, citing rules.
"Since pricing at the 2G auction was meant to act as a benchmark for deciding the pricing of all other spectrum, any downward revision will have a positive cascading effect" on airwave rates, Sushil Sharma and Pranav Kshatriya, analysts at Brics Securities Ltd., said in a note to clients on Nov. 15.