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Essar stands to gain big from Vodafone’s 3G ‘value’ addition
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Vodafone’s announcement that it would pay more to Essar to take into account the value of the recently acquired bandwidth to offer faster internet access for mobiles, will help the Indian company, given the current market scenario, say five analysts polled.

The UK-based global telecom operator on Friday valued Essar’s 33% stake in its India arm at Rs 3,400 crore more on account of added-value from the third generation or 3G bandwidth that the company recently bought in a government-led auction.

As a result, should Essar choose to sell some of its stake to Vodafone, it will get the fair market value for that stake as well as a proportionate amount of the Rs 3,400 crore, Vodafone said in a statement.

The value of the entire 33% is capped at $5 billion as part of a contract between Essar and Vodafone signed three year ago. In 2007, when Vodafone bought its 67% in what was known as Hutch Essar, it also agreed to a “put” or sell option for Essar, under which the minority shareholder would have an exit route out of the company for a window of one year after the 3G auctions.

Essar’s one-year period started on May 8. The company now has to choose one of the four options. The first is to continue to hold its entire 33% stake. The second is to sell a part of its stake to Vodafone and get a fair value plus a portion of the additional value from 3G; the third is to sell its entire 33% for $5 billion; and the last one is to attempt an initial public offering to exit its share.

The second is the most likely one, the analysts said. Indian analysts do not fully track Vodafone as the company does not disclose any details other than revenue, since it is not listed in India. In the first quarter, Vodafone Essar’s revenue for the quarter was £1.9 billion ($2.9 billion).

“The company’s operating margin would be around 28%, benchmarking against Bharti,” said an analyst with a domestic brokerage firm. Thus the company’s value based on the economic value by operating profit method would be $8.4 billion, he added.

Indian telecom sector has been battered since last October, when competition in the market became so intense that it almost halved the realised revenue per minute for all leading operators. The de-rating of the sector has resulted in a minimal investment and cautious valuations for equity. However, for Vodafone, the value of Essar’s stake would be anywhere between $4-5 billion, a research head of a multinational company said, asking not to be named as it is the firm’s policy not to comment on individual companies.

As one of the early movers in the market, Vodafone Essar has some of the high spending customers on its network, he said. The company is also well positioned to leverage 3G, as its widely known to have higher revenue from value added services like data, ring back tones, and astro forecasts than any of its peers.

Essar can therefore, expect around 35 months of revenue from wireless customers at the present customer base and average revenue, the analyst said. With around 100 million subscribers and an average monthly revenue per user of Rs 180-190, the fair value of Essar’s 33% comes to around $4.5-5 billion, under this method. Essar has time till next year to exercise its option, and it is unlikely to state intent before April next year, say analysts.

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