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Vodafone-Hutch Deal – VI

Challenges for Vodafone

Before Merger

  • The Indian telecom landscape is highly competitive yet the number of players has diminished over the years. A number of companies which were initially in the business including AT&T, Escotel and others have exited. Some companies like Tata have exited the GSM mobile platform while continuing to operate in other segments
  • The competition has been fierce and rivals without the staying power have just had no option other than to exit
  • At the same time government interference in the running of this industry has been increasing with adverse effects on profitability. Government pressure is bound to have the industry make investments in loss making rural areas.
  • The revenue per subscriber is reducing and the majority of Indian telephone subscribers have monthly bills of less than Rs. 500 (US $ 11).
  • What makes the industry thrive and tick is the increasing number of subscribers.
  • Mobile telephone bills have been reducing with reduced rates and increasing usage. The margins in the industry are wafer thin and profitability depends on volumes.
  • Vodafone already has a minority stake in Bharti – India’s largest telecom operator and wants to have a strategic tie up with Bharti. Essar has a controlling stake in BPL – another GSM telecom operator. Essar would like to operate independent of Bharti with which it has been competing. The relationship between Essar and Vodafone is going to be tricky in the above context with Essar keen to play a pivotal role

During Merger

  • Hutch-Vodafone deal was complicated simply because it was really three deals rolled into one. There was the deal between Hutch and Vodafone, between Vodafone and Essar and finally between Vodafone and the regulator
  • While Vodafone has  successfully  bagged  the  company  from Hutchinson  of  Hong Kong  and  the  deal  is  to  be  executed  outside  Indian  shores  yet  the  company, its  income  stream, its  assets, its  investment  partner  and  its  employees  are  all  based  in  India  and  subject  to  Indian  regulations, market  pressures  and  legislation

After Merger

  • Vodafone’s alleged tax evasion case is still in the courts and the next hearing is scheduled for March 3. The cellular operator has been given a $2 billion tax bill by the Supreme Court for not withholding tax when it acquired 67 percent stake in Hutch for $11 billion in 2007. Vodafone has challenged the jurisdiction of Indian tax authorities on the transaction which took place outside the country. Vodafone has been given a right of appeal to the Indian Courts should the tax authorities consider they have such jurisdiction
  • Visitor revenue (when subscribers of other operators roam into its network) suffered a negative impact due to the Mumbai attack and poor economic conditions that have reduced travel in the country
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