Vodafone Group Plc (VOD)’s victory in a four-year-long tax dispute in India clears the way for an initial public offering that may value its local mobile-phone unit at as much as 11.3 billion pounds ($17.6 billion).
Yesterday’s decision by India’s top court to dismiss the government’s demand for $2.2 billion in taxes from Vodafone on its 2007 purchase of Hutchison Whampoa Ltd. (13)’s Indian business removes a major obstacle for the planned IPO. Vodafone Chief Executive Officer Vittorio Colao said as recently as July that the company hadn’t been able to proceed with a listing as the tax dispute created an “uncertain” regulatory environment.
“It takes the IPO a step closer,” Robin Bienenstock, an analyst at Sanford C Bernstein in London, said in an interview. “This wasn’t a good moment for the Indian government to do something hostile.”
The ruling ends years of uncertainty over whether investors based outside the country can use offshore holding companies to avoid paying Indian taxes. Vodafone, seeking to expand in the world’s second-largest wireless market, last year gained control of the local venture by paying $5.46 billion to buy out its partner Essar Group’s stake.
Vodafone Essar has 146 million customers and a 17 percent market share, making it India’s third-biggest wireless operator behind Bharti Airtel Ltd. (BHARTI) and Reliance Communications Ltd. (RCOM) The country’s mobile-phone market may grow 28 percent to 872 million active subscribers by 2015, researcher Gartner Inc. estimated.
“The judgment will boost capital investments into India as some tax uncertainty will go away,” said Harish Salve, counsel for Newbury, England-based Vodafone. Vodafone spokesman Simon Gordon declined to comment on the details of a potential Indian IPO.
The 11.3 billion-pound valuation of Vodafone Essar is based on about 11 times earnings before interest, taxes, depreciation and amortization, Bienenstock said. Bharti Airtel is trading at about 10 times Ebitda, she said, adding that Vodafone’s local unit has better growth prospects.
Last year’s acquisition of a 33 percent stake in the Indian venture from Essar Group valued Vodafone Essar at $16.5 billion. The sale of a 5.5 percent stake in the local unit to Piramal Healthcare Ltd. (PIHC) last year, to reduce Vodafone’s holding to 74 percent and comply with local ownership rules limiting foreign ownership, valued the unit at $11.6 billion.
Vodafone rose 1.5 percent to 177.05 pence in London trading yesterday. The stock is down 1 percent this year, giving the company a market value of 88.7 billion pounds.
Keeping Majority Stake
Colao last year said that an Indian IPO could be similar to the share sale of the company’s South African unit. Vodafone kept a 65 percent stake in Vodacom Group Ltd. after the business was listed in 2009.
Vodafone would raise as much as 3.4 billion pounds if it decided to sell a 30 percent stake of the Indian venture, according to Bienenstock.
“We are a committed long-term investor in India and we have made clear all along that we have faith in the Indian judicial system,” Colao said yesterday. “We welcome the Supreme Court’s decision, which underpins our confidence in India. We will continue to grow our Indian business.”
Vodafone spent 116 billion rupees ($2.3 billion) in 2010 buying licenses for third-generation services after the entry of Norway’s Telenor ASA (TEL) and Japan’s NTT DoCoMo Inc. (9437) pushed voice- call rates to as low as a penny a minute.
The ruling by a Supreme Court panel headed by Chief Justice S.H. Kapadia said that the government can’t seek capital gains tax from Vodafone’s purchase of Hutchison’s wireless assets because the transaction occurred between foreign companies. The court also directed the government to return a 25 billion-rupee deposit Vodafone made on the contested tax bill, plus 4 percent interest.
“This allows Vodafone to focus more on the Indian operations, focus more on getting more subscribers, being more profitable rather than fighting on the tax side of it,” Romal Shetty, executive director of the telecommunications division at KPMG’s Indian unit, told Bloomberg UTV. “It’s a shot in the arm. But even from an industry perspective, it’s a boost.”
The Supreme Court’s tax decision, with its close political links, may also help to ease further regulatory limits on Vodafone’s Indian operations, enabling future acquisitions, said Will Draper, an analyst at Espirito Santo in London.
‘Setting the Tone’
“The Indian government is setting the tone by saying we might need to play a little fairer with the mobile industry,” he said.
Vodafone, the world’s largest mobile-phone company, had fought to dismiss the tax claim from its $10.7 billion purchase of Hutchison Whampoa’s phone assets since 2007. The Indian tax department sought 112.2 billion rupees in capital gains tax on Vodafone International Holdings BV’s purchase of Hutchison’s wireless operations in the country.
The operator still opposes a government decision to terminate its roaming agreements with other carriers in the country after the telecommunications ministry stated the contracts are a “breach of rules.”
The roaming decision shows the contradictory nature of the regulators in India, Bienenstock said. “It’s not a linear path to good and transparent regulation,” she said. “But it’s certainly a step forward.”