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Telecom
India
Thoughts on PHL’s stake purchase in Vodafone Essar. Piramal Healthcare Limited
(PHL) has entered into a transaction to buy 5.5% stake in Vodafone Essar from ETHL
Communication Holdings (Pvt.) Limited, an Essar group company, for US$640 mn. The
transaction values Vodafone Essar at US$11.6 bn. PHL management indicated a
FY2012E EV/EBITDA multiple of 11X for the transaction. Even as the transaction
multiple of 11X implies a 33% premium to the trading multiple for Bharti/idea, it also
implies a subdued 11% EBITDA growth for Vodafone Essar in FY2012E, lower than the
growth we build in for Bharti (wireless + passive infra segments) and Idea.
PHL to buy 5.5% stake in Vodafone Essar for US$640 mn
In a structured transaction, PHL has agreed to buy 5.5% stake in Vodafone Essar (VE), the 2nd
largest wireless player (by revenues) in India, for US$640 mn. The transaction values VE at an
equity value of US$11.6 bn and EV of US$19 bn, adding the US$7.4 bn net debt for VE, as
indicated by PHL management. PHL has exits through—(1) participation in VE’s IPO, if it happens,
or (2) selling this stake to Vodafone, VE’s parent, provided FDI norms permit, or (3) sale of this
stake to a third-party – PHL has indicated that Vodafone has an obligation to find a third-party for
PHL to sell this stake to, in case options (1) and (2) do not work out. PHL has also indicated a
target return of 17-20% (pre-tax) annualized on this investment and intends to hold the
investment for not more than 24 months. This is purely a financial transaction and PHL would not
have a board seat in VE.
Deal implies premium valuations and modest EBITDA growth expectations for VE in FY2012E
The deal, in our view, was probably prompted by the fact that Vodafone had to ensure FDI holding
of <=74% in VE post the exercise of put option by Essar and call option by Vodafone. Option
exercises on Essar’s stake in VE would have taken down the FDI holding in VE to 75.3%, 1.3%
over the FDI limit of 74%.
Nonetheless, from the perspective of the listed plays in the sector (Bharti, Idea, and RCOM), what
matters is the deal-implied valuations and FY2012E EBITDA growth for VE. PHL management
indicated a transaction EV/EBITDA multiple of 11X FY2012E. This is at a 33% premium to the
trading FY2012E EV/EBITDA multiple of Bharti (8.3X) and Idea (8.3X). However, the premium
reflects the nature of the transaction and should not be viewed as positive for the listed names. On
the flip side, the deal-implied FY2012E EBITDA growth for VE is just around 11%. This is
substantially lower than the FY2012E EBITDA growth built into our estimates for Bharti’s wireless +
passive infra segments (16% yoy EBITDA growth in FY2012E) and Idea (38%). We note that VE
runs a pan-India wireless business and has a 42% stake in Indus towers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
Thoughts on PHL’s stake purchase in Vodafone Essar. Piramal Healthcare Limited
(PHL) has entered into a transaction to buy 5.5% stake in Vodafone Essar from ETHL
Communication Holdings (Pvt.) Limited, an Essar group company, for US$640 mn. The
transaction values Vodafone Essar at US$11.6 bn. PHL management indicated a
FY2012E EV/EBITDA multiple of 11X for the transaction. Even as the transaction
multiple of 11X implies a 33% premium to the trading multiple for Bharti/idea, it also
implies a subdued 11% EBITDA growth for Vodafone Essar in FY2012E, lower than the
growth we build in for Bharti (wireless + passive infra segments) and Idea.
PHL to buy 5.5% stake in Vodafone Essar for US$640 mn
In a structured transaction, PHL has agreed to buy 5.5% stake in Vodafone Essar (VE), the 2nd
largest wireless player (by revenues) in India, for US$640 mn. The transaction values VE at an
equity value of US$11.6 bn and EV of US$19 bn, adding the US$7.4 bn net debt for VE, as
indicated by PHL management. PHL has exits through—(1) participation in VE’s IPO, if it happens,
or (2) selling this stake to Vodafone, VE’s parent, provided FDI norms permit, or (3) sale of this
stake to a third-party – PHL has indicated that Vodafone has an obligation to find a third-party for
PHL to sell this stake to, in case options (1) and (2) do not work out. PHL has also indicated a
target return of 17-20% (pre-tax) annualized on this investment and intends to hold the
investment for not more than 24 months. This is purely a financial transaction and PHL would not
have a board seat in VE.
Deal implies premium valuations and modest EBITDA growth expectations for VE in FY2012E
The deal, in our view, was probably prompted by the fact that Vodafone had to ensure FDI holding
of <=74% in VE post the exercise of put option by Essar and call option by Vodafone. Option
exercises on Essar’s stake in VE would have taken down the FDI holding in VE to 75.3%, 1.3%
over the FDI limit of 74%.
Nonetheless, from the perspective of the listed plays in the sector (Bharti, Idea, and RCOM), what
matters is the deal-implied valuations and FY2012E EBITDA growth for VE. PHL management
indicated a transaction EV/EBITDA multiple of 11X FY2012E. This is at a 33% premium to the
trading FY2012E EV/EBITDA multiple of Bharti (8.3X) and Idea (8.3X). However, the premium
reflects the nature of the transaction and should not be viewed as positive for the listed names. On
the flip side, the deal-implied FY2012E EBITDA growth for VE is just around 11%. This is
substantially lower than the FY2012E EBITDA growth built into our estimates for Bharti’s wireless +
passive infra segments (16% yoy EBITDA growth in FY2012E) and Idea (38%). We note that VE
runs a pan-India wireless business and has a 42% stake in Indus towers.
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