Jeremy Warner's Outlook: Arun Sarin must ask investors to take long view to win backing for his Indian ambitions

Retailers caught in the middle ground; Germany's economic miracle

The Indian business press is better known for its ability to spread disinformation than it is at illumination, so much of what is being written and said about the ongoing battle for India's fourth largest mobile phone company, Hutchison Essar, should be taken with a large pinch of salt. Amid the ill-informed and outright disingenuous, there was, however, one real piece of news yesterday - the Hinduja brothers have become the latest Indian business dynasty to throw their hats into the ring.

This makes life yet more awkward for Vodafone, which is attempting to buy Hutchison's controlling 67 per cent stake in the venture. Every time it blinks, seemingly, a new player enters the auction, raising what is already a quite racy valuation higher still. Can Vodafone's Arun Sarin hope to stay in the game?

I've already written extensively about the dangers of overpaying in what is everyone's favourite emerging market of the moment. Li Ka-Shing, Hutchison's chairman, is as canny a trader of assets as they come, and it should be remembered that when he last sold a mobile phone company - Orange to Mannesmann back in 1999 - it was at close to the peak for mobile phone valuations. If he's selling, then it means he thinks valuations are again at a cyclical peak. He may be wrong about this, but it is perhaps unwise to bet on it.

The excitement that surrounds the mobile phone industry in the developing world is in many respects quite similar to the frenzy that engulfed its European counterpart back then. The growth potential seems enormous, but so are the valuations. Ultimately, the growth came no where near justifying what Vodafone and others paid for these assets. Even so, Vodafone's Arun Sarin seems determined to play the field, and if it means paying a fancy valuation, then so be it. The big question is whether the City will back him.

To his credit, he's got the example of Vodafone's acquisition of Turkey's Telsim, which subsequently turned out to be a steal, to point to. This was bought on the apparently fanciful multiple of 36 times earnings before interest, taxation, depreciation and amortisation (ebitda). Most commentators said it was far too pricey.

A year on, and by improving quality of service, Vodafone has hugely advanced the number of subscribers. Improvements in network efficiency has further helped push the multiple down to 11. The upshot is that today the acquisition looks cheap. Proof positive, claims Mr Sarin, that Vodafone knows how to buy and manage emerging market assets.

All the same, it's plainly a risk. Nor do published criteria for buying emerging market assets give much cause for comfort. These stipulate that any acquisition must deliver an investment rate of return that exceeds the local, risk adjusted, cost of capital, by at least 200 basis points, and that the return on invested capital should exceed the local cost of capital within three to five years.

This means absolutely nothing at all, for it depends crucially on the assumptions used. Mr Sarin could very probably pay what he likes, and still make the numbers fit what looks to be a highly elastic corset. For instance, even at an enterprise value of $20bn, Goldman Sachs calculates that Vodafone could generate an after-tax return on invested capital of 9.5 per cent by year five.

On the face of it, such a valuation would test the criteria virtually to breaking point. Yet by assuming the sort of efficiency gains achieved in Turkey, Vodafone could easily argue that it would remain well within its limits. Mr Sarin is determined to succeed and there is no reason he shouldn't. The strength of his balance sheet gives him the flexibility to outbid even local operators with greater potential for synergies. But the price is unlikely to look a bargain and may in the short term even be earnings dilutive. Investors will be forgiven a touch of deja vu as they are once again asked to take the long view.

Retailers caught in the middle ground

The main flood of Christmas trading updates from the retail trade has yet to come, but already the pattern seems clear enough. Premium and luxury goods stores - John Lewis, Harvey Nics, Liberties, Marks & Spencer and even a once bombed-out House of Fraser - have continued to forge ahead. So have the supermarkets and the online retailers. But anyone caught in the middle ground seems to be in some difficulty.

Nowhere is this more apparent than in the trading update from Next. Catalogue and online sales in the five months running up to Christmas surged, but in the stores, like-for-like sales were down a knee-trembling 6.7 per cent, much more than previously anticipated. Even this may understate the true scale of the fall since, rather misleadingly, Next excludes stores where it thinks sales are being cannibalised by newly opened larger outlets.

It is possibly a tribute to the management skills of Next's impossibly youthful chief executive, Simon Wolfson, that despite this sales collapse, he still expects to beat market expectations on profits. Attention to stock control, margins and costs, are compensating for loss of customer pulling power. The problem for Next and other mid-ranking clothes retailers is easily identified - a resurgent Marks & Spencer. It is no coincidence that the boom years for Next were the ones in which Marks & Spencer had lost its way. Now the ship is back on an even keel, Next is struggling. Other fashion retailers too are being squeezed between the turnaround story of M&S on the one hand, and the supermarkets and discount retailers on the other.

Meanwhile, there is the growing problem of those who cannot be bothered to shop at all, but purchase all their kit online. In this regard, Next has thus far been reasonably successful at reading the trends. Yet even here, it faces ever greater competition, again with M & S leading from the front, as belatedly it gets its online strategy together. At M&S, the opportunities for cross promotion between the physical and virtual worlds is likely to be a good deal more powerful.

Don't write the middle ranking retailers off yet. Next in particular remains an exceptionally well-managed company. Yet there's no sun-lit uplands in prospect for such formats. To the contrary, conditions look set to get tougher and tougher.

Germany's economic miracle

German unemployment fell by nearly 600,000 last year. Let's just repeat that figure to allow its significance to sink in. Yes, that's 600,000. By any standards, this is a remarkable turnaround for an economy that has been mired in low growth and outright recession for most of the past ten years. While the total jobless rate at 9.8 per cent remains high, these are dramatic gains which powerfully rebut the prevailing British view of German economy recovery as just a temporary blip which will soon wither and die.

To the contrary, consumer and business confidence surveys point to the rebound continuing well into second half of next year, despite this month's 3 percentage point increase in the rate of VAT. Consumption may suffer a little in the wake of this hike, but few now expect it to be the buffer once feared. There are, of course, lots of reasons for caution. Germany's export miracle remains vulnerable to higher interest rates and a further weakening in the dollar.

But, as in Japan, there is now clear evidence that Germany's slow but determined approach to structural reform is working just as the doctor ordered. Job creation on this scale hasn't been seen in Europe for donkey's years. This is not all down to the following wind of a buoyant world economy. Angela Merkel, the German Chancellor, is plainly getting something right. Despite the political constraints she is under, her success will help to generate the courage and will for further reform.

What may be true of Germany is regrettably not yet the case in France and much of the rest of the eurozone. Here attitudes remain generally insular and protective. But who knows, by example Germany's success may eventually encourage others to embrace globalisation too, rather than constantly trying to resist it.

j.warner@independent.co.uk