Hutchison Essar/Vodafone

After its mishap with 3G in Europe, Hutchison Whampoa, which helped build the iconic mobile operator Orange, is regaining its reputation for alchemy in the telecoms sector. The auction of its 67 per cent stake in India's fourth biggest operator, Hutchison Essar, is turning into a feeding frenzy, with number two operator Reliance, Vodafone, minority shareholder Essar, as well as private equity bidders all reputedly interested.

Price expectations now imply an enterprise value of $19bn. The book value of the Indian unit's assets in Hutch's 2005 accounts - including goodwill - is below $3bn. As recently as June, Hutch bought out a 5 per cent shareholder at a price that implied an EV of $10bn.

For the bidders, short-term multiples now look rich at about 18 times 2007 earnings before interest, tax, depreciation and amortisation. India's low penetration and exceptional size (which may permit scale advantages) do demand a premium. But in order to justify the $19bn mark, bidders will have to start supercharging their discounted cash flow models by, for example, assuming market share gains, rises in average revenue per user, or earnings before interest, tax, depreciation and amortisation margins of more than 40 per cent in the long term. Such step changes are possible but plenty of emerging market adventures fail to live up to this kind of expectation: think of Telefónica's struggle in Mexico, or the degeneration of margins in Brazil's mobile market.

The best bet may be shares in Hutchison Telecommunications International (NYSE:HTX), the Hutch vehicle that owns the Indian stake. At an EV of $19bn for India, the implied proportionate EV for HTIL's residual assets is $2.5bn, or about six times 2006 ebitda. That is modest for a mix of mature units in Hong Kong and Israel and high-growth operations in Thailand, Vietnam and Indonesia. It will look very cheap indeed if Hutch can conjure more disposals as lucrative as its Indian exit.

source FT.com