UPDATE: Vodafone India Unveils Cost Cuts, IBM Deal

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LONDON -(Dow Jones)- Mobile phone giant Vodafone Group, Monday announced several initiatives aimed at cutting costs and helping it increase the market share of its fast-growing Indian business, Vodafone Essar.

Vodafone Essar will outsource all of its information technology operations to International Business Machines (IBM), building on an infrastructure-sharing deal announced Saturday, aimed at achieving $1 billion in cost savings by pooling radio masts, generators and other equipment with rivals Bharti Airtel and Idea Cellular.

The world's largest mobile phone operator by sales bought a controlling stake worth $10.9 billion in Hutchison Essar in May, in a bid to enter one of the fastest growing, highly populated telephony markets.

Chief Executive Arun Sarin Monday said that he expected to increase Vodafone Essar's market share in the country to between 20% and 25% over the next few years, from its current 17% share, by expanding the business into seven more regions in India and pushing further into rural areas. The company will invest around GBP2 billion over the next two years to build out Vodafone Essar's network and expand the business.

Vodafone has already taken a number of initiatives to grow in India, which has a population three times the size of Europe. In May, Vodafone launched two sub-$45 handsets, working with China's ZTE Corp., in a bid to make mobile phones more affordable to millions of Indians on low incomes.

"Mobile phone penetration in India is currently 19%, we expect that to be greater than 40% in a few years," Sarin said in London Monday at an investor day focused on its Indian operations.

Faced with slowing growth in the saturated Western European mobile phone market, Vodafone has been aggressively targeting emerging markets, such as India, Turkey and Africa, where there are still strong customer acquisition opportunities.

Sarin added that he expected Vodafone's EMAPA - Eastern Europe, Middle East, Africa, Asia Pacific and affiliates - business unit to contribute one-third of sales and earnings before interest, tax, depreciation and amortization, or Ebitda, in the next few years. Currently EMAPA contributes 25% of Vodafone group revenue and 22% of Ebitda.

Vodafone said that through a five-year outsourcing deal, IBM India will manage its Indian data center operations, as well as desktop, laptop and IT helpdesk management. By outsourcing Vodafone Essar, India's fourth-largest operator by customers, says it will be better positioned to keep pace with the rapid growth it expects in the region, while also delivering cost efficiencies.

"We are confident this will deliver cost efficiency as well as an enhanced service to our customers," said Asim Ghosh, managing director of Vodafone Essar, in a statement ahead of Vodafone's Indian investor day.

In November, Vodafone Essar reported revenue growth of 53%, adding 8 million customers between completing the deal to the end of September. The company has more than 36 million customers in India, a market which is adding on average 8 million new subscribers a month.

There are still another 900 million people yet to sign-up to mobile-phone services and the Indian government plans to double the number of phone subscribers to 500 million by 2010.

On Saturday, Vodafone Essar, Bharti and Idea Cellular announced the creation of Indus Towers, an independent towers company, that will merge the three companies' infrastructure assets and help them expand into India's rural areas. The deal is expected to save Vodafone $1 billion in costs over the next five years.

The three Indian mobile companies will share around 70,000 mobile mast sites through the joint venture, although they will retain separate control of wireless transmission equipment.

Vodafone Essar and Bharti each will own approximately 42% of Indus Towers and Idea will own the remaining 16%.

"The Indian consumer will be the ultimate beneficiary of this initiative, through improved network quality and broader coverage, especially in rural areas," said Vodafone in a statement.

Goldman Sachs analyst Simon Weeden said that the deal is an "important step in Vodafone's strategy" and one that will see the three companies build an additional 20,000 new sites per year, for the next three years.

More importantly, the deal could also act as a valuation catalyst, says Weeden, as the tower company could be listed in the future, or the stake sold to a financial investor to release capital.

"There are few peers for such a large infrastructure company in the Brazilian, Russian, Indian and Chinese economies and we would expect the valuation of its stake to be material to the group," said Weeden.

A Vodafone-led consortium was also awarded Qatar's second mobile telecommunications license Monday, beating rivals AT&T and Emirates Telecommunications (Etisalat), to launch mobile services in 2008.

Qatar, an oil-rich country in the Middle-East, has a population of around 900,000. The deal builds on other licenses Vodafone has recently won in the Middle East, most notably Egypt, where revenue increased 34% in the first half of the year, giving Vodafone 12.2 million customers.

ictQATAR, Qatar's telecommunications regulator, declined to disclose how much Vodafone and partner, the Qatar Foundation Consortium, bid for the license, which ends Qatar Telecom's monopoly.

At 1238 GMT, Vodafone's shares traded flat at 185 pence in a slightly firmer London market. The company's shares are up 36% since the beginning of the year.

-By Daniel Thomas, Dow Jones Newswires; 44-20-7842-9264; dan.thomas@dowjones.com

(END) Dow Jones Newswires

Posted to the site on 10th December 2007