ANALYSIS
Arun Sarin, the beleaguered Vodafone chief executive, has made a bold attempt to redeem his sagging reputation with a £5.6bn deal to buy a controlling stake in Hutchison Essar, India's fourth-largest mobile phone operator.

The deal for Hutch, as the company is known in India, is not without risks. However, it has been welcomed by many City telecoms analysts and investors, who were calling for Sarin's scalp a year ago because he had failed to deliver solid growth and sowed confusion about the group's direction.

Many City pundits thought at that time Sarin's days at Vodafone's helm were numbered. But the takeover of Hutch points to a clear strat-egy and should buy Sarin more time at the world's biggest mobile phone group.

"He seems to be a guy who has found his feet," said Shaun Collins, an analyst at CCS Insight, a telecoms consultancy.

"The City will look back and this will look like one of their (Vodafone's) best deals. They bought a very well-run company in the fastest-growing market in the world."

The deal gives Vodafone a big stake in a key emerging market, with an expanding middle-class and annual growth of more than 10%.

Vodafone said the purchase of Hutchison Telecommunications' 67% stake in Hutchison Essar values the Indian firm at $18.8bn (£9.6bn), including debt.

Vodafone made an offer to buy Essar Group's 33% stake in Hutchison Essar at the same price it bought out Hutchison Telecom, a holding company of Hong Kong-based Hutchison Whampoa, but this has been rebuffed by India's Ruia brothers, who own Essar.

The brothers said last week that they intend to hold on to their stake for the time being and hope to hammer out a shareholder pact next month with Vodafone. Some industry experts said they are holding out for a higher price.

If the Ruias do eventually sell, Vodafone will have to find another partner because Indian law prohibits foreign companies from owning more than 74% of a telecoms company.

Industry sources said Vodafone has already lined up partners to take on a minority role in Hutch.

Hutchison Telecommunications has scheduled a shareholders meeting on March 9 to vote on its deal with Vodafone.

It will have to explain why the company's stock has taken a sharp fall since the takeover of its Indian assets was announced earlier this month.

The Indian business is Hutchison Telecom's largest asset. After the deal, the company would be left with operations in Hong Kong, Israel, Thailand, and several other emerging markets.

The deal initially sent Vodafone's shares surging on the London Stock Exchange, suggesting that it pleased many investors - including some who had been critical of the firm's management in the past for spending too much on pricey overseas acquisitions. However, Vodafone stock fell sharply last week.

"Although near-term multiples look high, the growth potential is there to create real value for Vodafone share-holders if they leverage their brand and operating skills in a very exciting market," said Wesley McCoy, an analyst at Standard Life Investments.

Edinburgh-based SLI has a 1.7% holding in Vodafone - the largest mobile telecommunications network company in the world by turnover.

Standard Life has been a critic of Sarin in the past and voted against his reappointment last year.

Christian Maher, an analyst at Investec Securities, said Vodafone had paid a high price, but added that there were many benefits from the acquisition.

"The opportunity to get into this market on this scale was the right opportunity to consider in our view and the financials are broadly supportive," Maher said.

There is a lot of potential for growth in India as less than half the country has mobile coverage.

However, executives who attended a recent telecoms industry conference in Barce-lona, Spain, pointed out that in more rural areas potential new customers will not be able to pay the sort of prices that urban middle classes can afford.

Previous predictions of the lack of profitability in the cellular business in emerging markets, such as India and China, have not proven to be correct.

China now has 350 million subscribers, and India has 150 million. However, more than 50 million of the Indian subscribers were added in the last 12 months and their behaviour and loyalty is still unpredictable.

The Indian economy may accelerate on rising consumer spending for a year or two to 10% or more and then may experience a sharp pull back to 7%.

This does not look bad when compared to what was happening in the Indian economy only seven years ago, but stock market valuation can correct sharply.

Vodafone could have a subscriber base of 30 million and substantial market share of between 15% and 20% at the end of 2008, but profitability may be elusive.

The market share growth is going to come only with an annual investment of $2bn or more in the network expansion. Lower handset costs, innovative and cheaper telecom tariff, and lower monthly payment plans will also be needed.

Before the Hutch deal, Vodafone already had a position in the Indian market, with a 10% stake in the market leader, Bharti Airtel, which it acquired a year ago.

The UK company recently announced that it will sell just over half of that holding back to Bharti for $1.5bn.

Bharti has first refusal on the remaining 4.4% stake, which Vodafone is retaining.

Bharti Group's chairman, Sunil Mittal, said recently that he understood why Vodafone had gone for Hutch as it made sense strategically and India was one of the few fast-growing markets that foreign companies could enter easily - albeit at a price.