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Vodafone’s IPO Hinges on $8 Billion Question: Corporate India

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 second-largest 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 allegations in awarding spectrum to some operators in 2008 may deter IPO investors, according to Naveen Kulkarni, an analyst at PhillipCapital India Pvt. Mobile-phone 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.”

Bharti’s Performance

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, Mumbai-based Goldman Sachs Group Inc. analyst Sachin Salgaonkar wrote in a note to clients.

Bharti Airtel rose 2.7 percent to 309.5 rupees at the 3:30 p.m. close 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.

Vodafone Group, which has dropped 6 percent in the past 12 months, rose 0.4 percent to 158.5 pence in London.

Deferred IPOs

Indian companies have also deferred IPOs as growth in Asia’s third-largest economy slows. Just $303 million of IPO deals have been completed this year, data compiled by Bloomberg show.

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.

Renewal Permits

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.

‘Refarm’ Airwaves

Telecommunications Minister Sibal said this month the government may “refarm” or take away the 900 megahertz spectrum, and instead offer more 1,800 megahertz airwaves to companies seeking to renew their permits. The move may increase costs for carriers, that the industry association says are saddled with a combined debt of more than $23 billion.

The aim is to free up the more efficient 900 megahertz frequencies, that have a wider coverage, and offer it to operators in an auction to provide high-speed fourth-generation data services, Department of Telecommunications Secretary R. Chandrashekhar said on Oct. 17.

Regulators in Denmark, France and Sweden in 2009 joined the U.S. and Australia in allowing refarming of spectrum in the 900 and 1,800 megahertz bands in order to free up more airwaves for high-speed services, according to GSMA, an industry association.

‘Legal Debate’

Refarming would cost Bharti more than $2.4 billion in reassigning its network radio frequency architecture, according to an Oct. 17 report by Deepti Chaturvedi, a Mumbai-based analyst at CLSA Ltd. The company would see a “significant increase” in operating and capital expenditure, Chaturvedi said.

Bharti, backed by Singapore Telecommunications Ltd. (ST), would also have to purchase the 900 megahertz spectrum if it chooses to keep the airwave, she wrote.

The refarming of airwaves may prompt a “legal debate” among carriers, Pieters said.

“We are of course very interested in retaining our spectrum,” said Pieters. “We also think we are entitled to it. The government seems to think they can simply take it away. We think that that is not what’s written in the license.”

4G Services

Vodafone will also be “interested” in bidding for the 800 megahertz spectrum that can be used to offer services based on Qualcomm Inc. (QCOM)’s code division multiple access technology, he said. There were no bidders for the sale of the airwaves in the last auction.

The CDMA technology will enable Vodafone to offer 4G services in the country with 907 million cellular phone users, according to Pieters.

A drop in airwave prices and “more regulatory clarity” in the next 12 months will give investors confidence to invest in Vodafone’s IPO, said Kulkarni at PhillipCapital, formerly known as MF Global Sify Securities India Pvt.

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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