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VOD Allowed Full India Bid

Zacks Equity Research

Vodafone Group plc (VOD) has been recently approved to bid for the complete acquisition of stake of its Indian incumbent. According to new rules set by Indian authorities in August, foreign companies like Vodafone are now eligible for complete ownership of their local divisions, which were previously restricted to owning only 74% stake.

Vodafone holds 64.4% in its Indian subsidiary after purchasing assets from Hutchison for $11 billion. The new rule increases the company’s prospect for a complete takeover and tap the growth opportunities prevailing in emerging markets like India.   

The Indian market remains significant for Vodafone despite regulatory disputes that impede its growth in that country. Given the growth opportunities, the company is accelerating its investments in India to build infrastructure. According to reports, the company stated that it invested approximately INR 10 billion in 2012 in Delhi, Mumbai and Kolkata.

Further, in December, Vodafone’s CEO Vittorio Colao announced investment worth $3 billion over the next two years for strong infrastructural development in the company’s wireless platform. India is considered one of the two major markets by Vodafone for investments and expansion, the other being Germany.

The company is also looking forward to resolve the $2 billion tax disputes related to acquiring the assets of an Indian mobile company. The problem dates back to 2007, when Vodafone Group acquired the stake of Hong-Kong based, Hutchison Telecommunications International Limited in an Indian mobile company –– Hutchison Essar Ltd.

The transaction, which took place through the Netherlands-based subsidiary of Vodafone Group, resulted in the company acquiring a 67% stake in Hutchison Essar Ltd. and total control over the Indian operations of the latter.

The Indian Supreme Court bailed out Vodafone last year, stating it does not hold any tax liability on transactions taking place overseas. However, the Indian tax authorities seem to think otherwise and changed the country’s tax law retrospectively in 2012 to levy the tax on Vodafone. The case is still pending, with nothing much being done in this regard.

We believe that if the case does not work in favor of Vodafone, it may also hurt investment prospects as much of the liquidity will have to be shelled out to clear regulatory charges.

Despite this prevailing issue, Vodafone has an assured investment strategy in one of the world’s largest telecom market.

Apart from India, Vodafone also expects to uplift its market position in European countries like Spain, which was among the worst hit economies in Europe. Given the influx of $130 billion from selling Verizon Wireless stakes to Verizon Communications Inc. (VZ), the company expects to go ahead with its acquitting plans in this market so as to proliferate its wireless business.

Vodafone currently has a Zacks Rank #5 (Strong Sell).

Other Stocks

Ceragon Networks Ltd. (CRNT) and Fairpoint Communications, Inc. (FRP) with Zacks Rank #2 (Buy) are two stocks we find worth considering in this sector.

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