This article has been adapted from our sister site across the pond, Fool U.K.
Most of us know what it's like to go overboard at the local Indian restaurant. Faced with the impossible choice between lamb korma and chicken tikka masala -- not to mention the mixed tandoori grill -- we throw caution overboard and order it all, together with copious naan breads and the ever-irresistible pilau rice.
Cue a bloated feeling, if not downright indigestion.
We'll see whether Vodafone (NYSE: VOD) feels the same way in a few months' time, after it paid $5 billion in cash to buy out its Indian partner Essar from their joint venture, Vodafone Essar.
Vodafone acquired the additional 33% stake in the Indian subsidiary with a convoluted exercising of put and call options -- a legacy of its deal to enter the Indian market, when it acquired what was then Hutchinson Essar in 2007.
As a result of the move, Vodafone now owns 75% of the Indian operation. Just to keep things complicated, it will need to sell 1% to take it back to the 74% permitted under Indian law.
Expensive operations
When the 3 billion-pound cost of exercising the options is added to the 6.9 billion pounds it initially paid in 2007 for its controlling stake in its Indian venture, Vodafone has bet around 10 billion pound on its position in the huge but cutthroat Indian market.
So far, the result has been decidedly mixed. It was only in May last year that the giant mobile operator took a 2.3 billion-pound writedown against the value of the Vodafone Essar business, after the Indian government issued a half a dozen more mobile licenses and thus sparked a ruinously competitive price war.
The Indian government has also been pursuing Vodafone in the courts, alleging that it still owes some $2.5 billion in taxes on that 2007 acquisition.
On a more positive note, Vodafone Essar is now the second-largest wireless operator in India, after Bharti Airtel; it had 125 million subscribers as of December 2010, versus 153 million for its indigenous rival. At least the billions have gone on buying a decent market position, if not yet a profit bonanza.
In addition, Vodafone's $5 billion cash payment to Essar puts to bed what was becoming an increasingly unseemly public spat.
Essar had threatened to put one-third of its holding in Vodafone Essar into a small and relatively illiquid listed financial-services company it owns. Vodafone feared that magnified movements in that stock's price would misleadingly inflate the value of Essar's holding in the joint venture -- and, thus, the price of Vodafone would have to pay to buy out its partner.
Verizon Wireless still dividend-less
Now that Vodafone has extricated itself from one somewhat rancorous joint venture, perhaps its leadership can resolve another -- its 45% stake in Verizon Wireless, which it co-owns with Verizon Communications (NYSE: VZ).
A year ago there was talk that Vodafone's annual dividend might rise 45% if its partner agreed to let Verizon Wireless resume dividend payments in the 2011-2012 financial year. There's been no confirmation of that yet, although the better-than-20% rise in Vodafone shares price since then versus a mere 4% rise in the FTSE 100 may suggest that the market thinks it's increasingly likely, and Verizon Communications did say in January that its wireless subsidiary may pay a "fair dividend" to Vodafone.
For Vodafone's part, CEO Vittorio Coloa last week said that he had no plans to sell the stake in Verizon Wireless and that he would continue to push for a dividend.
New investors still don't have to pay a particularly onerous price to wait to see how this particular story unfolds. At 180 pence, Vodafone is trading on a P/E of a little more than 10 and yielding around 4.8%.
On the downside, Vodafone is still carrying 30.5 billion pounds of debt, which is clearly substantial even in the context of its 92 billion pound market cap and 45 billion pound turnover.
