Did Vodafone overpay for a stake in Hutchison Essar?

Vodafone (VOD), a British mobile telecom operator, has set a foot India with a purchase of 67% stake in Hutchison Essar. The bid valued the company, including $2 billion debt, at $18.8 billion. Hutch, at the end of December 2006, had little less than 24 million subscribers in India.

Deal Logic The average monthly revenue per subscriber has been between $8 and $10 or between $100 and $120 per year for almost all the cellular carriers in India. At the top end of the annual revenue of $120 per subscriber, Vodafone is prepared to pay nearly seven times fiscal 2006 revenue. Assuming 30% growth in cellular subscriber base and no growth or decline in annual revenue per subscriber, the deal values the company at five times the revenue in fiscal 2006.

Not to forget, this is multiple of revenue and not a multiple of operating earnings. The largest cell carrier, Bharti Airtel, has a market cap of $33 billion, and Reliance Communication is valued at $22 billion. The current Vodafone deal values ... more.

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