Vodafone May Have Overpaid for Hutchinson

123jump.com Staff
12 Feb, 2007
New York City

Vodafone has found its passage to India, but at what cost. The company, known for its expensive telecom asset acquisition in the past, appears to be ready to pay top dollars for a fast growing mobile operator in one of the fastest growing cell phone markets in the world. Assumptions of market growth rates may have to be revised if current estimates of economic growth rates may not be realized. Vodafone may need more than third partner to share this risk.

[R]7:00PM NY – 5:30AM Mumbai – Did Vodafone overpay for a stake in Hutchinson Essar?[/R]

Vodafone ((VOD)), a British mobile telecom operator, has set a foot India with a purchase of 67% stake in Hutchinson Essar. The bid valued the company, including $2 billion debt, at $18.8 billion. Hutch, at the end of December 2006, had little less than 24 million subscribers in India.

Deal Logic

The average monthly revenue per subscriber has been between $8 and $10, or between $100 and $120 per year for almost all the cellular carriers in India. At the top end of the annual revenue of $120 per subscriber, Vodafone is prepared to pay nearly seven times fiscal 2006 revenue. Assuming 30% growth in cellular subscriber base and no growth or decline in annual revenue per subscriber, the deal values the company at five times the revenue in fiscal 2006. Not to forget, this is multiple of revenue and not a multiple of operating earnings.

The largest cell carrier, Bharti Airtel, has a market cap of $33 billion, and Reliance Communication is valued at $22 billion. The current Vodafone deal values Hutch Essar at a roughly $800 per subscriber, similar to what market values for other cell carrier companies. But then market assumes that current subscriber growth rate of 50% will continue for many years to come.

Emerging Markets Rational

Cellular carriers around the emerging markets have found it difficult to justify the purchase price above three times trailing revenue, but then there are very few markets growing as fast as markets in India. If future growth is what is likely to help the current valuation, then investors have to ask two more questions. What is going to drive this future growth and what will stem the decline in average revenue per subscriber?

Growth Story of India

If the subscriber base increases only on cheaper cost of service and innovative price plans, then the current assumption of revenue growth may be difficult to attain. Future subscriber growth is likely to come from smaller towns and rural areas that are not likely to pay more than $60 per year for the telecom service and are going to demand handset that may cost less than $10. Of course, there is market at the bottom end of the industry, but is it as profitable as at the top end?

Frankly, at this point no one knows and only time will tell.

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 these subscribers in India were added in the last twelve months and their behavior and loyalty is still unpredictable.

Vodafone Deals

Last year, Vodafone sold its operation in Japan to Softbank and its 25% stake in Swisscom Mobile to Swisscom. The company also bought Turkey’s second largest telecom company of 12 million subscribers for $4.6 billion. This acquisition was done at half the price paid for Hutch Essar stake, when measured on cost per subscriber.

Vodafone still has to deal with two more issues: network build-out and ever declining monthly rates. If the current optimistic economic scenario remains true for the next two years, demand for cell phone services is likely to remain high. If economy slows down, either because of poor rainfall, slower IT export revenue or political turbulence then the demand for cell phone service is likely to drop faster than estimated. One only has to look at what happened when economies slowed down in Mexico, Indonesia and the Philippines.

At the current deal price there is very little room for error and only the most optimistic scenarios are discounted. All fast growing markets eventually slow down and return to their normal growth rates. Predictors of slow down in India for two years have been wrong, but with every passing day it appears that their case is getting stronger and stronger.

Next Three Years

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. Foreign investors are not known to be around when economies are slowing down, and there lies the problem for Vodafone.

Vodafone at the end of the year 2008 may have subscriber base of 30 million and substantial market share of between 15% and 20%, but profitability may be elusive. The market share growth is going to come only with an annual investment of $2 billion or more in the network expansion. The lower handset costs, innovative and cheaper telecom tariff, and lower monthly payment plans will also be needed. This price competitiveness points to a race to the bottom for five top players in India. New ways of managing business where every penny counts will be needed. Lessons learned from computer hardware makers in China and the U.S. will help Indian cell phone operators, but Indian companies have proven to be innovative.

It was not long ago when operators were charging sixteen rupees per minute of telecom call, but now rates hover near one rupee. In the coming years, operators will have to learn to live with rates below 70 paisa and struggle to generate profits, but stock market may not show any mercy. Stock market loves growth: revenue and earnings growth. But a toxic mix of lower growth in profitability, slower growth in revenue, and lower growth in subscription may kill cell carrier stocks.

Only seven years ago, Mr. Li Ka-Shing had sold Mannesman Telecom Group at the height of the telecom bubble to Vodafone. In less than three years, Vodafone had to write-down this asset significantly. While the news of this deal and foreign investments dominate headlines in India, one must not forget that not one paisa of $11.1 billion is likely to remain in India. Every paisa is destined to go to the bank account of billionaire Li Ka- Shing in Hong Kong.


[R]4:15PM NY; 10:15PM Frankfurt; 3:30AM Mumbai - GLOBAL MARKETS[/R]
Oil and precious metals fell. Oil fell 4% and gold dropped 1%. Three popular averages fell in New York trading. U.S. Treasury reported that the Federal deficit fell 57% in the first four months of current year. Global markets in Europe, Asia and Latin America fell. Russia and India led world markets with a loss of 2.5% and 2.4% respectively. Egypt gained 6.7% for the day.

Yield on 10-year bond closed at 4.806% and the 30-year bond closed at 4.885%.

Gold declined $6.300 to close at $666.300 a troy ounce, silver lost 22.5 cents to end at $13.665 a troy ounce and copper advanced $165.000 to close at $5548.000 per metric ton.

Oil lost $2.270 to close at $57.620 a barrel and heating oil decreased 8.410 cents to finish at 164.100 cents a gallon. Natural gas declined 60.7 cents to close at $7.220 per MMBtu. Gasoline dropped 6.880 cents to end at 154.600 cents a gallon.

Asian and African markets closed lower with Hong Kong shares slipping on heavyweight China Mobile, which will have its weighting cut in a shuffle of the city's benchmark index. On the other hand, China's stock markets rose on bargain hunting among blue chips. The decliners were led by India with a loss of 2.39%, Singapore with a decline of 1.57% and Taiwan with a decrease of 1.06%.

The advancers were led by Thailand with a gain of 0.31%. Financial markets in Japan were closed for a national holiday. Australia lost 0.07% where all sectors of the market lost ground except for materials, energy and utilities.

Egyptian CMA General Index rose 6.7%, sharpest rise for the day in the world.

European markets finished lower as construction-sector companies declined on interest-rate concerns, offsetting M&A-inspired gains from mobile telecom giant Vodafone Group. The decliners were led by France with a decrease of 0.85%, Germany with a loss of 0.75% and Spain with a decline of 0.72%. There were no advancers.

Russia’s main index dropped sharply and closed 2.5% lower.

Latin America markets closed lower led by Brazil with a decrease of 0.90%, Mexico with a loss of 0.68% and Argentina with a decline of 0.46%. There were no advancers. Canada lost 0.46% as the heavily weighted energy and materials groups were both trading in the red.

[R]2:30PM NY, U.S. Market Movers[/R]
Cytyc Corp. ((CYTC)) agreed to buy Adeza Biomedical Corp ((ADZA)) for about $450 million to expand company’s women's healthcare portfolio. Shares of Adeza rose 53%, touching a new year-high of $23.78 in early morning trade on the Nasdaq. It was the second biggest percentage gainer on the exchange.

Apogee Enterprises ((APOG)), glass product maker raised its fiscal 2007 earnings forecast, citing stronger performance to date in its fourth quarter. Shares of the company touched a year-high of $21.85 or 10.3%. The company expects earnings of $1.04 to $1.10 per share, compared with its previous view of 98 cents to $1.04. Revenue will be near the top of the prior range of 12% to 15% growth, the company said.

Asta Funding Inc. ((ASFI)), a consumer receivables asset management company, said it agreed to buy a $6.9 billion portfolio, consisting mainly of credit card accounts, for $300 million. Shares were up 10%.

Brush Wellman ((BW)) reported strong fourth-quarter earnings on higher demand across a majority of its key markets, driving company’s shares 26.7% higher. For the fourth quarter, the company reported net income of $30.3 million, or $1.48 per share, compared with $4.1 million, or 21 cents per share, a year ago. Sales of the company climbed 48% to $207.8 million.

YouTube, the popular online video sharing site owned by Google Inc. ((GOOG)) has signed a deal with Digital Music Group Inc. ((DMGI)) to offer such 1960s U.S. television programs as ""I Spy"" and ""My Favorite Martian"". Digital Music said the deal also includes an agreement to allow certain music, for which it controls the rights, to be used in users' videos uploaded to YouTube. Digital Music owns publishing or distribution rights to over 40,000 music recordings and over 4,000 hours of video content including television shows and films. Shares climbed 31.6%.

LCA-Vision Inc. ((LCAV)), an operator of laser vision correction centers, said that its fourth-quarter profit rose 8% as the company performed more procedures, resulting in strong revenue growth. LCA shares jumped $7.26, or 18.8%, to $45.97 on the Nasdaq. Shares have traded between $29.90 and $58.25 over the past 52 weeks. Net income grew to $7.1 million, or 34 cents per share, compared with $6.6 million, or 30 cents per share, in the year-ago period. Revenue climbed 26% to $58.8 million from $46.8 million last year, as procedure volume increased by 23%. Same-store revenue, or revenue at centers open at least 12 months, grew by 10%.

Medifast Inc. ((MED)) shares rose when the diet and nutrition products and services company forecast sharply higher revenue for full-year 2006 above previous guidance. For the year ended Dec. 31 the company put revenue at $73.5 million, up 83% from $40.1 million in 2005. The company previously forecast revenue between $70 million to $72 million. Shares rose $1.33, or 17%, to $9.10.

Onyx Pharmaceuticals ((ONXX)) said it plans to seek approval this year to market kidney cancer drug Nexavar to patients with advanced liver cancer, after a study showed it prolongs their lives. The shares of Onyx, a U.S. biotechnology company that has a 50/50 partnership with Germany's Bayer Holding AG to develop and sell the medicine, almost doubled on the news. Bayer, a far larger company with an array of marketed products, was little changed. Shares soared 100.2%.

Zoltek Cos. ((ZOLT)), engages in the development, manufacture, and marketing of carbon fibers for various applications, shares rose 9.6% after the company reported a first-quarter net loss of $5.66 million, or 23 cents per share compared with the same quarter last year, the company posted net earnings of $6.29 million, or 3 cents per share. The quarter included a charge of $8.4 million related to convertible debt and warrant issuances. Revenue climbed to $30.3 million versus $15.6 million in the same quarter a year ago.

Administaff ((ASF)) cut its growth forecast, citing cancellations by mid-sized customers and higher benefits costs, sending its shares down 18%.Administaff also reported a 22% increase in fourth-quarter profit to $13.4 million, or 47 cents per share, compared with $10.9 million, or 39 cents per share, a year earlier. It cited demand from small business owners, said it would increase its stock buyback and accelerate new office openings this year. Revenue rose 15% to $353 million, compared with Wall Street forecasts for sales of $358 million.

Chindex International Inc. ((CHDX)), provides health care products and services in China, reported a third-quarter net profit of $679,000, or 9 cents per share compared with the same quarter last year, when the company posted a net loss of $463,000, or 7 cents per share. Revenue rose to $30.3 million versus $22.6 million in the same quarter a year earlier. Shares went down 15.8%.

[R]1:00PM European markets closed lower, despite merger activity.[/R]
European stocks closed lower on Monday, as companies in the construction sector declined, offsetting gains from mobile telecom giant Vodafone Group. France's Saint Gobain and Britain's Hanson dropped more than 1% amid interest-rate worries. Shares in mobile operator Vodafone Group rose 1.3% after the company agreed to buy a 67% stake in India's Hutchison Essar for $11.1 billion. Another merger-inspired gainer was U.K.-headquartered tour operator MyTravel Group which rose 29% after MyTravel and KarstadtQuelle-owned Thomas Cook agreed to merge to form an international leisure travel company. KarstadtQuelle shares rose 4.2%, while TUI declined 1.4% as investors weighed up the potential impact of the deal on the German travel operator. First Choice Holidays dropped 13.5% in London as talks to sell its mainstream holiday business had been called off. Again on the M&A front, German chipmaker Infineon Technologies rose 1.3% on news it had been approached by at least three private-equity groups in the last six months. In Italy, Tenaris slipped 1.1% after agreeing to buy Hydril for more than $2 billion. The German DAX 30 index slipped 0.8% at 6,859.45, the French CAC-40 dropped 0.9% at 5,643.95, and the U.K. FTSE 100 fell 0.5% at 6,353.50.

Crude oil prices declined below $59 on expectations that the OPEC will not cut production. Light, sweet crude March delivery fell $1.30 to $58.59 a barrel. Heating oil slipped 5 cents to $1.6785, while gasoline fell 3 cents to $1.5795. Natural gas dropped 42 cents to $7.409 per 1,000 cubic feet. London Brent lost $1.47 to $57. The U.S. dollar traded higher against its major currency rivals. The euro was quoted at $1.2956, down from $1.3006. The dollar bought 121.83 yen, up from 121.64. The British pound was quoted at $1.9467, down from $1.9503. European gold prices lost ground. In London, gold traded at $661.20 per troy ounce, down from $663.30. In Zurich, the precious metal traded at $661.85 per ounce, down from $661.95. Silver closed at $13.55, down from $13.82.


[R]11:30AM U.S. stock markets extended losses amid collapsed merger deals.[/R]
U.S. stock markets continued to post losses amid disappointment over the collapse of several acquisition deals and cautiousness ahead of key economic data. Bristol Myers ((BMY)) dropped 5% on news that Sanofi-Aventis ((SNY)) ended deal talks amid a disagreement over price. Another disappointment came from Nasdaq Stock Market ((NDAQ)) which slipped 5.4% as its shareholders refused to support its planned takeover of the London Stock Exchange. At the same time, Four Seasons Hotels ((FS)) dropped 3% after it agreed to be taken private by Cascade Investment, Kingdom Hotels and Isadore Sharp for $3.8 billion, or $82 a share in cash. On the positive side, the UK's Vodafone ((VOD)) rose 2.4% after it agreed to buy Hutchison Telecom International Ltd.'s ((HTX)) 67% stake in Indian mobile operator Hutchison Essar for $11 billion, including the assumption of $2 billion in debt. Further in deal news, Aluminum producer Novelis Inc. ((NVL)) jumped 13.7% after it agreed to be bought by India's Hindalco Industries Ltd.

Losses posted by American Express Co. ((AXP)), Intel Corp ((INTC)) and United Technologies Corp. ((UTX)) weighed on the Dow. Another drag on the blue-chip average was Walt Disney Co. ((DIS)) which fell 1.2% although CIBC upgraded the stock to sector performer from underperform, and raised its price target on the stock to $40 from $35. Exxon Mobil Corp. ((XOM)) also weighed, losing 0.6% on falling oil prices. Some support to the Dow was provided by shares of Home Depot Inc. ((HD)), which rose 1.3% after the company said it is evaluating strategic alternatives for its HD Supply business, including a possible sale, spinoff or IPO. In the tech sector, Apple ((AAPL)) rose 1.4% after Citigroup upgraded the stock to buy from hold, while Adobe Systems Inc. ((ADBE)) rose 1.2% after Oppenheimer upgraded the stock to buy from neutral. However, heavy losses for Cisco Systems Inc. ((CSCO)) and Applied Materials Inc. ((AMAT)) weighed on the tech-heavy Nasdaq. In late morning trading, the Dow Jones industrial average fell 4.57, or 0.04%, to 12,576.26. The Standard & Poor's 500 index was down 2.11, or 0.15%, at 1,435.95 and the Nasdaq composite index retreated 7.20, or 0.29%, to 2,452.62. Bonds barely budged ahead of economic data due out this week, with the yield on the benchmark 10-year Treasury note unchanged from Friday at 4.78%.


[R]9:45AM U.S. stocks opened mixed amid disappointing deal news.[/R]
U.S. stocks opened narrowly mixed on Monday, as an upgrade of Apple failed to offset disappointing deal news and uncertainty ahead of key economic data due out later this week. Tech shares were supported by Apple ((AAPL)) which rose 1.3% after Citigroup upgraded the stock to buy from hold on expectations the company would benefit from several key products and lower prices. The Dow got a lift from 1.7% gain for Home Depot Inc. ((HD)) after the company said it is evaluating strategic alternatives for its HD Supply business.

In deal news, two anticipated merger deals seemed to be on the verge of falling apart. Bristol-Myers Squibb ((BMY)) fell 4% following a report that Sanofi-Aventis ((SNY)) ended merger talks with the U.S. pharmaceutical group. The Nasdaq Stock Market ((NDAQ)) fell 1.6% after saying over the weekend that shareholders did not approve its bid to acquire the London Stock Exchange. On the other hand, the UK's Vodafone ((VOD)) rose 2.4% after it agreed to pay $11 billion for Hutchison Telecom International Ltd.'s ((HTX)) 67% stake in Indian mobile operator Hutchison Essar. Four Seasons Hotels ((FS)) dropped 3% after it agreed to be taken private by Cascade Investment, Kingdom Hotels and Isadore Sharp for $3.8 billion, or $82 a share in cash.

In the first hour of trading, the Dow Jones industrial average added 3.53, or 0.03%, to 12,584.36. The Standard & Poor's 500 index was down 1.26, or 0.09%, at 1,436.80 and the Nasdaq composite index retreated 9.02, or 0.37%, to 2,450.80. Bonds edged lower ahead of economic data due out this week, with the yield on the benchmark 10-year Treasury note rising to 4.79% from 4.78% late Friday.


[R]9:30 AM NY, 7:30PM Mumbai –
Vodafone appears to bid the highest in the Hutchinson Essar auction.[/R]

Vodafone acquired 67% of Hutchison Essar in a deal struck last night that puts the fourth-largest Indian mobile operator value at $18.8 billion. Vodafone is known to make expensive telecom in the last seven years only to find it difficult to justify purchases at a later date. The deal is expected to provide a much-needed respite and boost to Vodafone stock in an otherwise luck-luster top-line growth at the British company, the largest mobile operator in the world.

Still, Arun Sarin, Vodafone CEO may be faced with question by some investor whether the group has overpaid. One shareholder has already said that the deal may get some resistance from shareholders of Vodafone on that premise. As part of the deal, the British company has signed an agreement for sharing its network with Bharti Airtel, which could help both companies to share telecom network and reduce network build-out cost.

Bharti was also granted an option to buy out Vodafone’s 5.6% of the 10% stake in the company for $1.6 billion, which is double the acquisition price. The deal is expected to be executed in the second quarter.

India is the world fastest growing mobile phone market with an additional 6.5 million net subscribers per month in the last quarter. Only 15% of people in India have cell phone service and less than half of country has cell phone coverage.

Vodafone may be looking at India as its largest market by subscribes in the next two years. Currently its German subscriber base is more than 26 million, and through a joint venture partner Verizon has more than 24 million subscribers in the U.S. Its Indian subscriber base is likely to reach 30 million or more by the end of calendar year 2008. If acquired, Hutch Essar or to be named Vodafone unit, is likely to be third largest cell phone company in India by the end of this year only to be trailed by Bharti and Reliance Communication.


[R]8:00AM NY-6:00PM Mumbai Sensex plummets on selling pressure.[/R]
The Sensex on BSE finished 348.20 points, or 2.39%, lower at 14,190.70. The market-breadth was very weak as there were seven decliners for each advancer. For 2,312 shares that declined on BSE, only 334 advanced and only 27 shares were unchanged. The turnover on BSE was Rs 3,266 crore, lower than Rs 4,332 crore on Friday. The turnover on NSE was Rs 8,908.45 crore, compared to Rs 9,175.13 crore on Friday.

Economic news

Industrial production in December 2006 advanced 11.1%, compared with 5.7% in the same month last year. The growth figure for November 2006 has also been revised upwards to 15.4%, from the earlier estimate of 14.4%. Growth in the manufacturing sector was 11.9% in December 2006, higher than 6.4% in December 2005, while electricity generation grew by 9.3% in December 2006, compared to 3.4% a year ago. The figures raised concerns that the Reserve Bank of India may hike the interest rates in order to curb inflation and to prevent overheating of the economy.

Vodafone won the battle for Hutch-Essar with a $19 billion bid. Vodafone will offer ultra low-cost handsets, and bring Vodafone live! to India. Hutch-Essar will aim at 20% to 25% of the market share. The company plans to keep the current management team.

India has been adding six million new subscribers for the last three months. Despite one of the fastest telecom market in the world only 15% of people in India have cell phone services and less than 50% of India can access telecom service through mobile phone. The subscriber growth in the current year is likely to exceed 30%.

Trading highlights

Global Broadcast was the most-active stock with a turnover of Rs 247 crore followed by Hindalco and newly-listed Technocraft.

IPO

Technocraft Industries India ended at Rs 100.90 on BSE on its first day on the market, with a volume of 98.63 lakh shares. It opened at Rs 125 on BSE, 19% over the IPO price of Rs 105 and reached an intra-day low of Rs 97.35 and high of Rs 130.

Decliners

Hindalco Industries, the aluminum large-cap, led the decliners, plunging 14% after acquisition of Novelis worried. Investors are nervous that the company may have overpaid and in the short term this will be a drag on the company financials. The stock closed at Rs 149.05. The total acquisition cost including assumed debt of $2.4 billion reached $6 billion. Novelis, registered in Canada but operating in the U.S. is the largest flat rolled products company in the world with a 19% share of the global market.

Reliance Communications also took a plunge of 4.63% to Rs 453.55, as it lost the bid to buy the Hutch Essar in a bid rivalry with Vodafone. Other large-cap decliners included BHEL, shedding 6.3% to Rs 2,348, Bharti Airtel, off 4.6% to Rs 718 and Gujarat Ambuja Cements, losing 4.54% to Rs 132.50.

Of stocks with representation in the Sensex index, Reliance Industries finished at Rs 1,354, losing 2.5%, Infosys dipped 0.5% to Rs 2,350 and oil leader ONGC slipped 2.1% to Rs 865. ICICI Bank ended at Rs 965 and TCS at Rs 1,254 each lower around 2.7%.


[R]7:30 AM Asia ends lower Monday with HK and South Korea leading decline.[/R]
Asian markets closed mostly lower on Monday. The Hong Kong Hang Seng Index closed 0.4% lower at 20,593. In Hong Kong, large-caps ended lower, led by China Mobile, which will have its weighting reduced in the Hang Seng Index and by property developers on worries about delays in U.S. interest rate cuts. China Mobile shed 1.6%. Hong Kong property developers declined after three U.S. Federal Reserve officials warned Friday they were ready to raise rates if U.S. economic growth was stronger than expected. Sun Hung Kai Properties dropped 1.7% and Cheung Kong Holdings fell 1%.

South Korean Kospi Index shed 0.9% to 1,414. Kookmin Bank dipped 2% after climbing 3.2% Friday, and Hana Financial Group fell 2%. Semiconductor makers settled lower, with Samsung Electronics off 2.2% and Hynix Semiconductor losing 2.2%. The Shanghai Composite Index soared 2.8% to close at 2,807. China Minsheng Banking gained 5.7%, China United Telecommunications rose 5.1% and China Petroleum & Chemical, known as Sinopec, advanced 4.8%. Australian S&P/ASX 200 dropped 0.1% to 5,924. All sectors of the market declined except for materials, energy and utilities. BHP Billiton rose 1.9% but Fairfax fell 1.2% as concern over advertising revenue outweighed the fact that its net profit topped market expectations. Lend Lease declined 4.7% after warning that its first half profit would be flat.


[R]6:30 AM Europe was lower on Monday on weakness in financial and tech stocks.[/R]
European markets were lower on Monday. In early trade, Frankfurt Xetra Dax shed 0.7 % to 6,862.36, the CAC 40 in Paris lost 0.7 % to 5,651.19 and London FTSE 100 slipped 0.3 % to 6,364.1.

Advancers

Infineon, German chipmaker, gained 1.7%. Infineon was best performing stock last week after announcing contract wins with Nokia and MasterCard. Share acquisition moves in the telecoms sector provided the market some succour. Spanish Telefonica said it had held talks with Italian Pirelli and was offered a small stake in Olimpia, which controls Telecom Italia. Telecom Italia shares gained 1.8 %, while Pirelli added 3.7% and Telefonica fell 0.6%. UK tour operator MyTravel Group bucked the lower travel sector trend, rising 26.4% after MyTravel and KarstadtQuelle-owned Thomas Cook agreed to merge to form an international leisure travel company. Vodafone Group rose 1.7% after the company agreed to buy a stake in India''s Hutchison Essar for $11.1 billion.

Decliners

ASML Holding, maker of equipment for manufacturing memory chips, fell 2%, while Franco-Italian chipmaker STMicroelectronics shed 1%. Industrial groups took a hit after recent strong sessions. MAN, the German truckmaker, fell 2.1 % after questions were raised about its future following its failure to acquire Swedish Scania. Airline Air France-KLM and cruise ship operator Carnival Corp each trading down more than 1.2%.

Oil

U.S. crude oil for March delivery fell 82 cents in electronic trading. The contract was down 74 cents at $59.15 a barrel, while London Brent crude was off 67 cents at $58.34 a barrel in early trade in London.