A key Vodafone shareholder has told The Times that the group should consider abandoning its $18 billion (£9.3 billion) pursuit of the Indian group Hutchison Essar after the billionaire Hinduja brothers entered the auction.

State Street, which holds about 1.7 per cent of the world’s biggest mobile group, said that Vodafone risked repeating past mistakes of overpaying in an overheated situation such as the 3G licence sale.

Mark Webster, senior investment manager at State Street, said: “The key is that Vodafone must meet the acquisition criteria it has set. If it looks as though they might be breached, then it must be prepared to walk away.”

Mr Webster’s concern was echoed by analysts, including Morten Singleton at WestLB. “At the higher price levels we are looking at now, it looks increasingly risky,” he said. “If Vodafone is going to be asked for too much, then it has to be prepared to walk away.”

The growing doubts about Vodafone’s Indian ambitions came as the Hinduja Group, the conglomerate managed by the four Hinduja brothers, joined the band of suitors circling Hutchison Essar.

They include Essar, Hutchison’s 33 per cent joint venture partner; Reliance, India’s second-biggest mobile operator; and Maxis, the Malaysian mobile operator.

Ashok Hinduja, chairman of the group, said that he had informed Hutchison of his interest in buying a stake in Hutchison Essar, in which it had sold its 5.1 per cent holding last June: “We are not interested in anything less than 51 per cent as we would like a controlling stake,” he said.

Helped by “strong communications” from Sir John Bond, Vodafone’s new chairman, Vodafone investors were initially supportive of the group’s Indian ambitions.

However, as the bidding has intensified, some have become concerned about the risk of Vodafone overpaying. It is expected to offer all cash if it is successful.

Last month Macquarie, the Australian bank, put Hutchison Essar’s enterprise value at $13.7 billion, with an equity value of $12.18 billion. The strong interest has pushed the value of the whole closer to $20 billion, analysts say.

Vodafone recently laid down strict new acquisition rules. The rules, which are aimed at ensuring that transactions yield a return above the cost of capital within three to five years, were introduced by Arun Sarin in response to fierce criticism about the company’s performance under his management.

However, the group has yet to explain to its shareholders how a bid for Hutchison Essar will fit those criteria. Investors say they would need cast-iron evidence of the deal’s merit before agreeing to it.

While India has huge growth potential — some industry experts believe mobile penetration could triple in the next four years — analysts said it was not clear whether the levels would justify an $18 billion bid by the British mobile group.

Vodafone, which under Indian law is limited to a 74 per cent direct holding in Hutchison Essar, is understood to be in talks with several potential local partners. Such tie-ups could help to reduce the group’s own bill, analysts said.

Countdown

Dec 20, 2006 Vodafone emerges as a potential bidder for Hutchison Essar

Dec 22 Hutchison Inter- national confirms several approaches for its 64 per cent stake in Essar

Dec 28 Essar confirms its interest in buying out the whole group

Jan 4 Hinduja brothers enter the fray expressing their interest in a stake of at least 51 per cent

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