Vodafone (LSE: VOD) (NASDAQ: VOD.US) has plenty on its plate right now. As the company is struggling to revitalise its European business, peers here in the UK are making a dash for market share and now, over in India, competition is hotting up.
Increasing competition
India is a key market for Vodafone. Indeed, City analysts have predicted that over the next three years, India is expected to account for nearly half of Vodafone’s service revenue growth.
However, a new competitor has recently joined the market, Reliance Jio, which is part of the Reliance Industries empire. Still, according to some analysts, the arrival of Reliance Jio will not start a full-blow price war. Many regional telecoms providers are still recovering from a price war that lasted from 2009 to 2013, which led to a severe decline in industry tariffs.
That being said, it’s believed that Reliance will concentrate its efforts on the data market. Reliance acquired a 4G licence along with airwaves in an auction during 2010 has been working on a market strategy for four years. The company plans to hire more than 3,000 staff to set up real and distribution chains across India over the next few months.
A new competitor is bad news for all Indian mobile operators but Reliance’s focus on data is a direct attack on Vodafone India. Vodafone India started its own initial 4G trials earlier this year and the company was using its 4G presence within the country to gain an edge over peers.
Subscriptions to Vodafone India’s 3G data contracts have exploded over the past year. It was hoped that the company would replicate this success with 4G. Now Reliance has entered the market it is believed that a cost war will push down 4G service revenue by 20%, which could offset much of Vodafone India’s growth.
Underpaid
Unfortunately, as Reliance starts to take market share from Vodafone India, Vodafone is facing pressure here in Europe from an activist hedge fund.
The fund, Elliott Management is trying to prove that Vodafone underpaid for Kabel Deutschland last year. Figures suggest that the company was worth much more than the €84.53 per share paid by Vodafone.
And within the past few days an auditor has concluded that Kabel Deutschland was worth more than Vodafone paid for it. Indeed, Kabel’s own projections and valuations suggest that it was worth €104 per share. Elliot on the other hand is demanding €250 per share. If the courts agree, Vodafone could be liable for up to €8bn in compensation.
This ruling comes at a terrible time for Vodafone as it is rumoured that the company is weighing up a bid for Liberty Global, a multimedia empire that owns, among other assets, Virgin Media here in the UK.
Not only would the acquisition of Liberty allow Vodafone to jump-start its growth within Europe but it would also remove one of the company’s key competitors from the market. But with a $38bn market cap, and $40.1bn in net debt Liberty will not come cheap. If Vodafone has to payout €8bn in compensation to Kabel Deutschland shareholders, the Liberty deal could be shelved for the time being.
