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Vodafone agrees to acquire control of Hutch Essar in India
Presentation 12 February 2007
the US Securities and Exchange Commission (the “SEC”) under the US Securities Exchange Act of 1934. All written or oral forward-looking statements attributable to Vodafone Group Plc. we discover additional information relating to its business leading to restructuring charges or writeoffs or with other negative implications. the comparable GAAP measures such as turnover and reported items on the consolidated profit and loss account or the consolidated statement of cash flows. or form part of. “may”. any obligation to update or revise these forward-looking statements. identified by their use of a date in the future or such words as “anticipates”. Vodafone Group Plc does not undertake. “will”. This presentation contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our expectations and plans. and expectations with respect to long-term shareholder value growth and the actions of credit rating agencies. This presentation does not constitute. By their nature. speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. The Vodafone Group Plc's management believes these measures provide valuable additional information in understanding the performance of the Vodafone Group Plc or its businesses because they provide measures used by Vodafone Group Plc to assess performance.sec. the risk that ARPUs may decline or may decline more dramatically than expected. the arrangements with Bharti relating to infrastructure sharing. or any solicitation of any offer to purchase any security in any jurisdiction. “aims”. please refer to documents Vodafone Group Plc has filed with. future developments or otherwise. for additional factors. plans with respect to these transactions. future performance. the impact of legal or other proceedings. “intends”. the risk that credit rating agencies downgrade or give other negative guidance with respect to our debt securities which may increase our financing costs. management’s objectives. “should”.gov). “expects”. “goal” or “estimates”. but rather as complementary to. or otherwise furnished to. These factors include. including the Annual Report on Form 20-F for the year ended 31 March 2006 and subsequently furnished Form 6-Ks (which are available at the SEC’s Internet site (http://www. Forward-looking statements are sometimes. In addition to the factors noted above. any offer or invitation to sell. upon completion of the acquisition of the controlling interest in Hutch Essar. nor shall it (or any part of it) or the fact of its distribution form the basis of. “due”. strategy. on mutually acceptable terms and conditions. any members of Vodafone Group or persons acting on our behalf are expressly qualified in their entirety by the factors referred to above. but are not limited to: regulatory approvals that may require acceptance of conditions with potential adverse impacts. Any person who is not a relevant person should not act or rely on this presentation or any of its contents. any contract thereafter. costs. The presentation also contains certain non-GAAP financial information. persons to whom such presentation may lawfully be communicated ("relevant persons"). Information in this presentation about the yield on shares cannot be relied upon as a guide to future performance. revenues. “plans”. No assurances can be given that the forward-looking statements in this presentation will be realised. whether as a result of new information. earnings and other trend information. they should not be viewed as replacements for. “could”. and specifically disclaims. and the risk that. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. forward-looking statements are inherently predictive. risks and uncertainties that could cause actual results and developments to differ materially from the expectations disclosed or implied within the forward-looking statements made herein. “believes”. “targets”. or be relied on in connection with. risk involving our ability to realise expected benefits associated with the transactions referred to herein. including statements relating to expected benefits associated with the transactions contemplated herein. but not always. and is only directed at. the ability to formalise. Although these measures are important in the management of the business. 2 Analyst presentation .Vodafone agrees to acquire control of Hutch Essar in India Vodafone Group Plc 12 February 2007 Disclaimer The following presentation is being made only to.
Chief Executive Operational review of Hutch Essar Paul Donovan.Agenda Key highlights Arun Sarin. Chief Executive 3 Analyst presentation Hutch Essar and Vodafone Controlling interest in a major. Chief Financial Officer Summary Arun Sarin. fast growing market Meets our twin financial investment criteria Strong management team with good cultural fit Vodafone and Hutch Essar will derive greater value together 4 Analyst presentation . EMAPA CEO Financial impact Andy Halford.
8 billion (£9.0 billion (£1.7 billion) Net debt assumed: approximately US$2.6% listed interest in Bharti for US$1.Key highlights Acquisition of a controlling interest in Hutch Essar • • • • • Acquisition of companies that control a 67% interest in Hutch Essar Transaction consideration: US$11.5 billion) • Retention of 4.6 billion) Completion expected by second quarter of calendar year 2007 Infrastructure sharing MOU with Bharti • A signed MOU between Vodafone and Bharti relating to a comprehensive range of infrastructure sharing options expected to: – materially reduce the total cost of delivering telecommunication services – bring mobile communications to rural areas – expand network coverage more quickly Local partners • Vodafone will make an offer to buy Essar’s stake at the equivalent price per share it has agreed with HTIL • Arrangements with other existing minority partners will result in a shareholder structure that meets the requirements of India’s foreign ownership rules • Granted a Bharti group company an option to buy 5.0 billion)1 Implied enterprise value: US$18.1 billion (£5.8 billion) subject to completion of Hutch Essar transaction • Compares to the acquisition price of US$0.8 billion (£0.6 billion (£0.4% indirect interest in Bharti underpinning ongoing relationship with Bharti 10% economic interest in Bharti Note: 1 As at 31 January 2007 5 Analyst presentation Key growth opportunity consistent with strategy 1 • Accelerates Vodafone’s move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market – India is the world’s 2nd most populated country and the fastest growing major mobile market 2 • Hutch Essar delivers a strong existing platform in India – nationwide presence with recently acquired circles – experienced and highly respected management team 3 • Driving additional value in Hutch Essar – infrastructure sharing MOU with Bharti plans to reduce substantially network opex and capex – only operator in India integrated into a leading international mobile company 4 • Increases Vodafone’s exposure to high growth emerging markets – proportion of Group statutory EBITDA from the EMAPA region expected to increase from below 20% in the year to 31 March 2007 (FY2007) to over a third by FY2012 Acquisition meets Vodafone’s stated financial investment criteria Acquisition meets Vodafone’s stated financial investment criteria 6 Analyst presentation .
Germany. analyst consensus 7 Analyst presentation Underpinned by strong fundamentals India is the 2nd fastest growing major economy… 2006-2015 real GDP growth …with a fast growing telecoms market Indian telecoms market revenues 50 US$43.1 20 40% 10 7% 50% 65% 0 India Europe¹ Russia Japan China Brazil US 0 CY2006 Mobile voice Mobile data CY2010 Fixed voice Fixed data Sustained economic and telecoms market growth Sustained economic and telecoms market growth Note: Source: 1 Europe includes France.6bn CA G R 10 40 18 % 4% 20% 2006-15 real GDP growth (%) 8 7.000 80 800 (m) (%) 60 40 300 189 143 127 20 0 Brazil Europe¹ Europe² Brazil US US India Japan Japan China Russia Russia China India 13 54 41 600 400 200 0 494 1.A very large market with significant growth potential India is the world’s 2nd most populated country… Population (Dec-06) 1. Germany. Spain and UK EIU. OVUM 8 Analyst presentation .318 1.5bn 3% 6 4.3 6.0 2 1.400 1.116 …where mobile penetration remains low Mobile penetration (% as of Dec-06) 120 108 100 78 77 107 Penetration expected to exceed 40% by FY2012 and exceed 50% in the longer term Penetration expected to exceed 40% by FY2012 and exceed 50% in the longer term Notes: 1 Population: Europe includes the 27 countries in the EU 2 Mobile penetration: Europe includes France. Spain and the UK Source: Informa.3 4 3.8 2.9 30 US$bn 11% US$22.4 2. Italy.200 1. Italy.
0 Ending customers Net Additions Net additions of 64 million customers in 2006 vs.0 80 60 40 2.0 0 Ju n97 Ju n98 De c98 Ju n99 De c99 Ju n00 De c00 Ju n01 De c01 Ju n04 De c04 Ju n02 Ju n06 De c06 Ju n03 De c03 Ju n05 De c05 De c97 De c02 0. 29 million in 2005 Net additions of 64 million customers in 2006 vs.0 5. TRAI is evaluating active network infrastructure sharing to underpin teledensity targets • Termination rate less than 1US$cent/min Note: 1 Telecom Regulatory Authority of India 9 Analyst presentation Indian mobile market net adds growth has accelerated Mobile monthly net adds of 6.0 20 1.5m in 4Q CY2006 Indian mobile monthly net adds evolution since 1997 140 Introduction of micro prepaid 7.0 New Telecom policy (NTP 1999) 4. 29 million in 2005 Source: COAI. roaming and infrastructure sharing • Clear Government targets for teledensity driving high-level policy initiatives – 500m telecoms connections by 2010 (implies significant rural coverage) Regulatory status – 20m broadband subscribers by 2010 • High levels of fees and taxes have been reduced to promote affordability and increase teledensity • Sharing of passive infrastructure (sites. towers) permitted and encouraged by government.Evolving economic and regulatory environment • Gradual economic reform has delivered major cumulative change since 1991 – reducing bureaucracy and state influence over business decisions Economic environment – promoting competition by privatisation and de-licensing key sectors – encouraging foreign investment into more sectors of economy – capital market reforms – relaxation of foreign exchange rules • Regulatory institutions well-developed among emerging market peers: TRAI1 (regulator) features – consultative decision-making processes with appeal rights – dynamic – recent consultations on 3G licensing.0 120 Third and fourth operator entry Ending customers (m) 100 Net additions (m) Calling party pays Fourth cellular licenses issued 3. Association of Unified Telecom Service Providers of India (AUSPI) 10 Analyst presentation .0 Introduction of lifetime prepaid plans 6.
0 16. exchange rate: US$1 = INR44.9 297 32.249 4.551 23.2 1.442 10.282 40. mobile customers only 2 The customer number of Hutch Essar excludes 1.8 21.9 415 32.6m from addition of BPL circles 17.1 million customers for BPL Mumbai as the acquisition is still pending Source: Public data.8 2 Includes consolidation of BPL since 1-Jan-2006 3 2005 ARPU and MOU as of Q4 2005 and H1 2006 ARPU and MOU as of Q2 2006.513 2.8 392 H1 20062 908 50.4 352 27.3% • 900 MHz provides an opex and capex advantage • Significant increase in capex in H1 2006 reflecting entry into new circles Notes: 1 Exchange rate: US$1 = HK$7.9 million net adds in CY2006 – 1.2 3.306 2 12.One of only 4 major mobile operators in India National Regional Customers (000s) 1 32.8 11.980 25. US$m) Revenue y-o-y growth (%) EBITDA Margin (%) Capex Capex/revenue (%) 2005 11. AUSPI 11 Analyst presentation Improving KPIs Key operating and financial metrics1 (Dec y/e) Customers Prepaid (%) ARPU3 (US$) MOU3 (Dec y/e.6 385 2005 1.1 18.5 82. COAI.8 9.7 383 42.4 8.2 • Margin improvement expected as new circles achieve scale and BPL turnaround effected – some existing circles already have EBITDA margin exceeding 40% – H1 2006 EBITDA margin excluding the 3 BPL circles of 34.8 7.450 Market share (%) 1 22.466 29.7 No. of circles/total 23/23 23/23 23/23 22/23 13/23 20/23 2/23 2/23 Technology GSM CDMA/GSM GSM GSM GSM CDMA GSM GSM Hutch Essar provides a strong platform for future growth Notes: 1 As at end December 2006.5 H1 2006 2 Comments • 11.4 77.0 Source: Hutch Essar – The results of Hutch Essar are reported in Hong Kong dollars and prepared in accordance with Hong Kong Financial Reporting Standards which may differ in material respects from the accounting principles applied by Vodafone 12 Analyst presentation .
EMAPA CEO .Creating value in India Controlling position in a leading operator with nationwide presence Strong existing platform for growth Additional value under Vodafone ownership Increases Vodafone’s presence in high growth markets Consistent with strategy Consistent with strategy 13 Analyst presentation Operational review of Hutch Essar Paul Donovan.
expected to exceed 50% longer term Source: COAI. Informa. AUSPI 15 Analyst presentation Strong penetration growth potential Penetration by circle category (Dec-06) 57 60 50 40 (%) 30 20 10 0 14 10 6 Metro circles A circles B circles C circles Total pop (m) 50 355 498 213 Nationwide penetration currently at 13%.Indian mobile market Circle-by-circle breakdown Total customers (Dec-06): Total penetration (Dec-06): 142 million 13% Key facts • India is divided into 23 licence territories or “circles” for the purpose of mobile services Delhi • Circles are categorised as follows – Metros (4 largest cities) – A circles (states with highest earning power) – B circles Kolkata – C circles (states with least earning power) Mumbai • Each circle typically has 5-6 operators – 2 private GSM operators on 900 MHz Chennai – 1 Government owned GSM operator (MTNL/BSNL) – 1 active private GSM operator on 1800 MHz – 1-2 CDMA operators on 800 MHz Metro circles A circles Note: Source: 1 Map not to scale B circles C circles COAI. AUSPI. analyst consensus 16 Analyst presentation .
Hutch Essar footprint and competitive positioning Hutch Essar footprint Original Hutch Essar 13 circles • 21. 4 Metros ( ) BPL 3 circles Recently acquired 6 circles (Spacetel) Madhya Pradesh and Chhattisgarh (licence pending) Notes: 1 2 By customer market share Map not to scale Licence pending • Madhya Pradesh and Chhattisgarh licence requested and pending Source: COAI.2 player1 • Leading player (no.0% penetration • Highly attractive 900 MHz position • Ongoing improvement programme Chennai 6 newly licensed circles (Spacetel) • 213m licensed pops. analyst consensus 17 Analyst presentation The operational plan for Hutch Essar Expanding distribution and network coverage Lowering the total cost of network ownership Growing market share Driving a customer focused approach Driving value growth in India Driving value growth in India 18 Analyst presentation . overall no. 13. overall no. AUSPI. 15.0% penetration • Planned operational launch during 2007 Original Hutch Essar 13 circles.3% market share.1 or 2) in 7 circles Delhi • Highly attractive 900 MHz in 9 circles • 616m licensed pops.1% market share.7% penetration BPL 3 circles (acquired in 2006) Kolkata Mumbai • 10. Informa. incl.5 player1 • 201m licensed pops. 6.
000 km today Source: Hutch Essar data 19 Analyst presentation Accelerate roll-out and reduce network cost • MOU outlines a process for achieving a more extensive level of site sharing – sharing of tower. power supply and air conditioners – separate electronics. shelters. back-up diesel generators.1. spectrum and backhaul transmission – benefits expected to commence during 2007 • MOU covers both new and existing sites – around 1/3 of current Hutch Essar sites shared with other Indian mobile operators – longer term anticipated to result in approximately 2/3 of total sites shared • Significant capex and opex savings achievable for Hutch Essar – c.000 retail stores globally • Vodafone brand attractive to HVCs Distribution – c.Expanding distribution and network coverage Hutch Essar management • No subsidy (SIM only).5% 20 Analyst presentation . low cost to connect • c.1.800 Hutch branded shops today with further investment planned Vodafone value add • Continue to invest in existing model • Accelerate distribution roll-out in line with network roll-out plans • Proven retail experience in over 7.000 exclusive dealers for contract – c. build network and launch service • Complete nationwide fibre backbone – 27.US$1bn opex and capex savings over first 5 years – opex saving improves EBITDA margin by c. civil works.300.000 retail outlets for prepaid • Proven approach to building distribution in new coverage areas • Overall coverage of Indian population below 40% today • Network performance comparable to major competitors in Hutch Essar 16 circles – Hutch Essar network fully EDGE enabled • Increase investment to build market share • Infrastructure sharing MOU with Bharti to enable industry leading cost structure for sites • Targeted sharing of active infrastructure Network • BPL 3 circles: continued aggressive roll out of network • Spacetel 6 circles: secure spectrum.1.
Opportunity for further network cost savings • Current regulatory consultation on broader infrastructure sharing to support rural areas and teledensity target Population density • MOU with Bharti envisages the scope to include active infrastructure sharing – potential to extend agreement to sharing of radio access network and access transmission • Potential significant additional savings on capex and opex People / km² 0 <100 <250 <500 <1000 >1000 Note: Source: 1 Map not to scale GPW — Gridded Population of the World 21 Analyst presentation Developing consumer and business propositions Hutch Essar management • Hutch brand across 16 circles Vodafone value add • Move to dual brand and ultimately to Vodafone Brand • Strong consumer focus • Recognised major business brand • Historically strong in Metros and A circles • Comprehensive customer segmentation – much lower HVC churn Consumer • Leadership in contract segment • Mass market prepaid focus e. low value INR10 “sachet” recharge • Successful VAS – premium SMS and ringback tones • Critical first mover advantage in Mumbai/Delhi • Well established National Corporates business • • • • Introduce ultra low cost handsets Bring Vodafone live! to India Global partnerships including content Mobile payments including balance transfer • Address total communications opportunities • Only operator in India integrated into an international mobile company – international voice and data roaming – unique offers for multinational corporate accounts Business – leading market share • Investment required for SME/SOHO • Access to proven product portfolio • Mobile office expertise Source: Hutch Essar data 22 Analyst presentation .g.
AUSPI 23 Analyst presentation Driving a customer focused approach Hutch Essar management • Team that built the business • Highly experienced and customer focused management team • Good cultural fit Vodafone value add • Proven expertise in integrating and working with local management teams • Proven best practice and benchmarking to accelerate change • Potential for specific skills injection e. CRM and billing 24 Analyst presentation .g. Haryana Karna. and automated systems • Industry leading process improvement based on extensive customer research • First stage nationwide consolidation complete for 16 circles • Invest and innovate to maintain industry leading capabilities • Introduce proven CRM and customer management expertise • Customer Insight systems • Purchasing scale benefits IT • Single billing system in 2007 • Capacity upgrades for all key systems incl. internet. Tamil Nadu A ssam B ihar Hima. Chennai P unjab A ndhra P radesh Kerala M ahara.Growing market share 2006 Hutch Essar market share by circle Established circles Developing circles BPL Spacetel 40 35 30 Market share (%) 25 37 28 26 26 26 20 20 20 15 10 5 0 Gujarat UP -E M umbai Ko lkata West B engal Delhi 19 Overall target market share 17 16 16 14 12 12 10 9 UP -W Rajast. retail. Jammu/ No rth P radesh Kashmir East Orissa M adhya P radesh Average market share: 28% Average market share: 16% Average market share: 10% Average market share: 0% Targeting a nationwide 20-25% market share Source: COAI. data warehouses. CRM/Data Senior team • Strong challenger mentality • Recognised industry leader Customer service • Comprehensive approach across call centres.
Summary Hutch Essar provides an excellent platform for future growth Clear operational plan to deliver value Infrastructure sharing MOU plans to significantly reduce cost High quality experienced management team Driving value growth in India Driving value growth in India 25 Analyst presentation Financial impact Andy Halford. Chief Financial Officer .
c. neutral by the fifth year • Commitment to longer term targeted dividend payout of 60% of adjusted EPS EPS2 Dividend • Dividend per share at least maintained in the short term Notes: 1 On a pro forma statutory basis.Core assumptions Financial and operating assumptions Operational assumptions Impact from infrastructure sharing Penetration • > 40% by FY2012 Hutch Essar market share • 20-25% by FY2012 Opex and capex benefits • c. FY2007 to FY2010 2 Vodafone’s adjusted EPS includes acquired intangible amortisation 3 Estimated acquired intangible asset amortisation expense of about £0.7% dilutive to adjusted EPS in the first year post acquisition.US$1 billion combined benefits over first 5 years with c.25-0.35 billion as shorter lived assets become fully amortised 28 Analyst presentation .5% EBITDA margin uplift EBITDA Financial assumptions • A FY2007-12 CAGR around the mid-30s Capex Cash tax rates • Increased investment.1.30-34% ROIC test met in year 5 and IRR around 14% ROIC test met in year 5 and IRR around 14% 27 Analyst presentation Impact on Group performance Transaction impact • Increases Vodafone’s exposure to high growth emerging markets Emerging markets exposure – proportion of Group statutory EBITDA from the EMAPA region expected to increase from below 20% in FY2007 to over a third by FY2012 Growth1 • Around one and a half percentage points accretive to Group three year revenue and EBITDA CAGRs • Broadly neutral to adjusted EPS in the first year post acquisition and accretive thereafter excluding the impact of intangible asset amortisation for the transaction • Including this impact3.3-0.4 billion per annum initially. particularly in the first 2 to 3 years • Capex/revenues in low teens by FY2012 • 11-14% in FY2008-12 due to various tax incentives • Longer-term trend towards tax rate of c. reducing to £0.
8 to 23.6% listed direct interest in Bharti Assuming no change in foreign exchange since September 2006 29 Analyst presentation Summary Arun Sarin.0 billion (£1.4 (1.7 to 2.0 billion).7 FY2007 FCF guidance Less H1 FY2007 FCF Implied H2 FY2007 FCF Pro forma March 2007E net debt3.0 20.2 (3.3 Entirely funded from existing resources Entirely funded from existing resources Notes: 1 2 3 4 Exchange rate of £1 = US$1.2) 3. Chief Executive .7 to 5.2) 22.1) 6.2 1. Assumed closing on or before 31 March 2007 Excluding proceeds from sale of 5.95 for illustrative purposes Assuming Hutch Essar net debt of US$2.Debt impact Vodafone pro forma March 2007E net debt £bn1 September 2006 net debt Dividends Net impact of other acquisitions and disposals Hutch Essar acquisition2 (4.
Creating value in India Controlling position in a leading operator with nationwide presence Strong existing platform for growth Additional value under Vodafone ownership Increases Vodafone’s presence in high growth markets Consistent with strategy Consistent with strategy 31 Analyst presentation .
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