In one of the key takeovers in Indian telecom, Vodafone acquired majority stake in Hutchison Essar in 2007.
The battle for Hutchison Telecom India’s 67 per cent stake in Hutchison Essar came to an end in February 2007 with UK-based telecom major Vodafone beating Essar, Reliance Communications and the Hindujas to win the stake. The article recorded industry reactions to the biggest takeover battle in the history of Indian telecom…
FEBRUARY 2007: The high drama surrounding Hutchison Telecom India Limited (HTIL)’s 67 per cent stake sale in the country’s fourth largest mobile operator, Hutchison Essar Limited (HEL), is drawing to an end with UK-based Vodafone Plc winning the bidding war. Vodafone, the world’s biggest mobile operator outside China, beat three rival suitors – Essar, which owns 33 per cent of HEL, Reliance Communications and the Hindujas.
At $19.3 billion (including debt) for 100 per cent of HEL, the Vodafone bid, according to analysts, is reasonable and “not over the top” as was anticipated, going by the company’s history of overpaying for deals. The expectation was that the bids would cross $20 billion. “We have got this at a very reasonable price and we are thrilled. We are feeling very good in terms of talking to shareholders and the returns we will provide them,” said Chief Executive Arun Sarin on winning the bid. In a statement, Vodafone announced that it had agreed to acquire the companies that control 67 per cent interest in Hutchison Essar from HTIL for a cash consideration of $11.1 billion. This acquisition is Vodafone’s biggest since its $231 billion purchase of Germany’s Mannesmann in 2000. The deal meets strict acquisition criteria and is expectedly finding support from investors.
The acquisition will make India Vodafone’s third largest mobile phone market after Germany and the US. It will give the company access to a ready 23.3 million subscribers and 16.4 per cent nationwide market share. Also, the acquisition fits in perfectly with the company’s strategy of investing in emerging markets to offset narrowing margins in the saturated European markets. India is expected to grow to 500 million users by 2010, currently adding 5-6 million users a month.
For Li Ka Shing, promoter of HTIL, the stake sale is a lucrative exit having originally put in only $2.6 billion into its India operations. Now, it only needs to be seen whether the acquisition can be completed. It is subject to Indian regulatory approvals and the Essar Group’s willingness to be a partner in the deal. According to Ruias, promoters of the Essar Group, their compliance is necessary as they hold the crucial right of first refusal. They had earlier stated that they would exercise this right and would consequently match the highest bid at any price.
However, for now, analysts are not sure about which way the tide will turn. The Essar Group has issued a statement saying, “Vodafone has offered that we be their partner. We are at the moment evaluating all our options in the best interests of the group.”
Ravi Ruia, vice-chairman of the Essar Group, has further noted: “Vodafone’s offer valuing HEL at around $19 billion is a good price which reflects the premier position of HEL as India’s leading operator. Essar owns 33 per cent of the company and we are delighted that Hutchison and Essar have together created this value.”
Sarin has indicated that the company would like to retain the current management of HEL, even after the takeover – if and when that happens. HEL’s managing director, Asim Ghosh, who holds 5 per cent in HTIL, has expressed his willingness to continue in the top job. He has been with the company ever since its inception. “The board will have to decide… If they want me, I am available.”
Otherwise, Vodafone expects to exercise full operational control over the company, provided Essar decides to accept. Vodafone is keen to increase its presence in India as it is looking to garner at least a third of its profits from emerging markets by 2012, compared to less than 20 per cent currently, claim company officials. The HEL acquisition is expected to facilitate this.
In the context of Indian telecom operators, analysts are of the opinion that the takeover will not bring any major change in either the valuation or the financials of companies like Bharti (in which Vodafone had picked up 10 per cent stake in 2005) and Reliance Communications. Of course, for CDMA player Reliance, it is a bit of a disappointment, especially as it would have fitted in with Anil Ambani’s plan to enter the GSM space and would have made the company a leading player in the mobile space.
What Vodafone’s entry will bring to the Indian telecom market is considerable expertise in 3G mobile telephony. Observes Romal Shetty, director, Telecom Risk Advisory Services, KPMG, India: “Vodafone entering India will be a good thing for the consumer. It will bring new products and 3G services at lower costs. The domestic market will have an international player with a lot of experience and good practices.”
Meanwhile, in light of the HEL deal, the Bharti Group has arranged to buy back Vodafone’s 5.6 per cent direct stake in Bharti Airtel for $1.6 billion on a deferred payment basis. Vodafone will, however, continue to hold an indirect 4.4 per cent economic interest in Bharti Airtel as a financial investor and will not have any representation on the Bharti board nor any management rights.
Welcoming Vodafone into the country, Sunil Bharti Mittal, chairman and managing director of Bharti, announced the recently signed memorandum of understanding for sharing infrastructure. Vodafone also agreed to make Bharti its preferred vendor for long distance and leased line services, apart from promising nearly 50 per cent of its in-bound roaming traffic for three years. “Infrastructure sharing is expected to reduce the total cost of delivering telecom services, especially in the rural areas, enabling both parties to expand network coverage more quickly and to offer more affordable services to a broader base of the Indian population,” the statement said.
By and large, operators in the country and Vodafone’s investors worldwide are happy with the company wining the Hutch bid. What remains to be seen now is, will Essar seal the deal? s
Industry Speak: Views on the Hutch takeover
Ravi Ruia, Vice-Chairman, Essar Group
“The Essar Group is a strategic player in infrastructure development in India and neighbouring countries. Telecommunication is a core business for the Essar Group. Vodafone’s offer values Hutchison Essar Limited (HEL) at around $19 billion. This is a good price which reflects the premier position of HEL as India’s leading telecom operator. Essar owns 33 per cent of the company and we are delighted that Hutchison and Essar have together created this value. Vodafone has offered that we be their partner. We are at the moment evaluating all our options in the best interest of the group.”
Sunil Bharti Mittal, Chairman and Managing Director, Bharti Airtel
“We are pleased to welcome Vodafone and congratulate them on their Hutch acquisition. Today, the Indian telecom sector is one of the most sought after in the world and the bid is a strong endorsement of the government policy to promote the sector. Bharti and Vodafone have enjoyed a very fruitful partnership and both companies will work with the industry towards connecting millions of people across India.”
Anil D. Ambani, Chairman, Reliance Communications
“We congratulate Vodafone and welcome them to India. Vodafone’s participation is a further endorsement of the exciting future growth potential and the progressive policies prevailing in the Indian telecom sector. Reliance’s bid was made in line with our publicly declared and consistent philosophy of sustainable value creation and financial conservatism in the face of truly challenging acquisition valuations. Our bid also took into consideration the unique benefits of in-country consolidation and the substantial synergies that an existing player like Reliance alone enjoyed.”
Sourabh Kaushal, Industry Manager, Information and Communication Technology, Frost & Sullivan, India
“With 3G coming up, Vodafone’s entry into the domestic telecom sector will be a good thing for India as the company has substantial experience in providing 3G services. For consumers, it signifies tariff reduction due to increased competition and better experience as service quality is expected to improve with Vodafone bringing in best practices and services offered in its other operational markets. We are currently analysing the bids of all the players. On the face of it, the valuation seems to be slightly on the higher side. And that’s the reason Essar is currently evaluating its options as it feels that the current valuation offers it a good opportunity to rethink its strategy. As far as Vodafone is concerned, it is currently into markets that are more or less saturated and with this deal it gets an opportunity to be in one of the fastest growing markets.”
Krishna Ramachandran, Manager, Risk and Business Solutions, Ernst & Young, India
“Primarily, the Vodafone bid displays that the valuation of the telecom business in India has skyrocketed. We thought that with Maxis and Telekom Malaysia acquiring a stake in Aircel and Spice respectively, the big deals were through. However, large deals are still coming through. There is renewed interest in India’s telecom market. With Vodafone’s entry into the Indian telecom market, there will be new technologies, value-added services and new products. Since 3G is ready to roll out, the market looks quite challenging. Hutch is an asset for Vodafone as many European operators are looking for emerging markets.”
Mahesh Uppal, Director, Com First
“There should not be many short-term implications of Vodafone entering the market. In the long term, the presence of an international major which has more revenues and more subscribers than all Indian telecom players combined is something of importance. This will lend stability to the market. However, this is not something that Reliance will be happy about. It was hoping to get into GSM and Hutch is a successful GSM player with high revenues and consumer base. However, it was not to be. It appears that we will continue to see the same number of GSM players and at least two substantive CDMA players, namely, Tata and Reliance.”
Romal Shetty, Director, Telecom Risk Advisory Services, KPMG, India
“Vodafone entering India will be a good thing for the consumer. It will bring new products and 3G services, as well as lower costs. The domestic market will have an international player with a lot of experience and good practices. Hutch was valued high as it has high ARPUs and a good management team. It also has higher end subscribers. Vodafone offers 3G services, which will be adopted by higher-end users.”
Archana Sasan, Partner, Kochhar and Company
“The interest shown by various parties, including a foreign company like Vodafone, in acquiring a stake in Hutch has once again highlighted the interest of the global business community in India. The interest shown by Vodafone, which already holds a share in Bharti Airtel, is indicative of the fact that Vodafone is pleased with the profitability of its investment in India in order to consider acquiring a stake in a second Indian company. It’s a matter of speculation whether the shareholders of Bharti will agree with the step being considered by Vodafone. The investment in Hutch by Vodafone, if it comes through, will send a strong signal to global giants that there still exists opportunity to invest in India’s mobile telecom industry, which is one of the fastest growing in the world. Also, foreign investment in any sector will add to the booming foreign reserves of the country.”