/* ----------------------------------------------- Comment out annoying Snap... ----------------------------------------------- */

Friday, November 17, 2006

Vodafone & HWL

A lot has been made in the press about the possibility of Vodafone buying H3G UK. Arun Sarin mentioned post interims that if 3 UK was for sale then he would definitely be interested. Canning Fok fired right back with 3UK was not for sale, but Arun Sarin has a large wallet. This to me signifies the start of negotiations.

The biggest obstacle to sealing a deal is determining a price that 3UK is worth without HWL losing face publicly and highlighting the lack of return of the overall investment. If HWL packages together the whole of the European Operations including assets in Italy, Ireland, Austria and Scandinavia, I still see cannot HWL getting a return on its investment. Vodafone would want to factor in that in the medium term there are some EuroAssets that it would not wish to own. I feel Vodafone would immediately want to dispose of Austria to its local partner Telekom Austria and probably would try and auction the Scandinavian assets to TeliaSonera, Telenor and Tele2.

In addition, I do not feel that Vodafone could buy the European assets without a major investigation by national regulators and worst of all, Brussels. I don’t think this would be a problem in the UK which would move to a four MNO model but the rest might object out of principle. In Ireland which would move to a three MNO model, Eircom would almost certainly object. In Italy which would move to a three MNO model with no MVNOs, Telecom Italia would want a quid-pro-quo for not objecting and Wind would be livid. It is clear to me that strategically the market is crying out for consolidation in these countries and the end of the day every operator will benefit from less competition. I’m not sure whether Brussels and the national regulators will necessarily go along with competition being so reduced in several markets.

There are a lot of potential hurdles to Vodafone owning HWL European Operations, but the biggest problem is that HWL would almost certainly lose money on its overall investment. I’m not sure HWL is that desperate for an exit. I feel the probability of a deal in this format is small.

There is also a possibility that HWL could bundle its emerging market portfolio into the deal in the form of HTIL. Again, there are large hurdles to this transaction. The first is HTILs major asset which is India competes directly with Vodafone major asset, Bharti. Although I think Vodafone would be look very closely at swapping a majority ownership in the #3 player for a minority in the #1. I also feel that some of the HTIL’s assets are in fact basket cases and more a liability for Vodafone: these include assets in Israel and Thailand. However, there are a few prime growth assets in Vietnam and Indonesia. Of course, there are also HTIL saturated assets in Hong Kong and Macau. In fact, HTIL looks a closer fit currently to China Mobile aspirations than Vodafone. HTIL also has the problem of dealing with two partners who do not seem happy at the moment – Orascom and Essar of India. Again, I think there is a small probability of doing the deal because of the complexities.

Despite all this, Li Ka-Shing and Sir John Bond will know each other extremely well given their backgrounds in Hong Kong. If anyone can manage to mould a deal appealing to both sets of shareholders, dealing with the political complexities and unruly partners, it is Sir John Bond and Li Ka-Shing.