Vodafone Wins Control of Hutchison Essar with US$11.1-bil. Bid

In a statement released last night, Vodafone said that it has agreed to buy a 67% stake held by Hutchison Telecommunications International Ltd. (HTIL) in India's Hutchison Essar for a cash consideration of US$11.1 billion. Vodafone will also assume net debt of approximately US$2.0 billion, valuing the Indian firm at US$18.8 billion. Arun Sarin, Vodafone’s chief executive, said "this is clear evidence we are succeeding in our development strategy in higher-margin emerging markets”.

Vodafone said it will also make an offer to buy out the remaining 33% stake in Hutchison Essar held by India's Essar Group at the equivalent price per share it has agreed with HTIL, in spite of Sarin stressing that "we very much welcome Essar to stay as our partners.' "We have been offered by Vodafone to be their partner," said Ravi Ruia, the Essar Group vice chairman, adding "we are at the moment evaluating all our options in the best interest of the group." Essar is expected to make a decision in the next few weeks.

Vodafone added that its arrangements with the other existing minority partners will result in a shareholder structure post acquisition that meets the requirements of India’s foreign ownership rules, which prevent foreign firms from holding more than 74% of an Indian telecoms operator.

Sarin also indicated that he had offered a Bharti group company an option to buy Vodafone's 5.6% direct holding in Bharti Airtel (Bharti) for US$1.6 billion, double the US$800-million price it paid for the shares 15 months ago. The British mobile giant will retain a 4.4% indirect holding in Bharti, India's largest mobile operator by subscribers. In addition, Vodafone has signed a memorandum of understanding (MoU) with Bharti relating to a comprehensive range of infrastructure sharing options in India between Hutch Essar and Bharti. Vodafone said "infrastructure sharing is expected to reduce the total cost of delivering telecoms services, especially in 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".

Outlook and Implications

• Good Deal for Hutchison Whampoa: The 67% stake in Hutchison Essar was put up for sale last December by HTIL, a unit of the Hong Kong-based conglomerate Hutchison Whampoa. Vodafone was competing with India's Reliance Communications, Hinduja Group and Essar Group, which already owns 33% of Hutchison Essar. It emerged yesterday that HTIL has decided to sell its 67% stake in Hutchison Essar to Vodafone in preference to three local bidders after just the first round of bidding. Hutchison Whampoa, headed by billionaire Li Ka-shing, has had a history of building up businesses and selling them on when the companies attain a good value. This time, the sale of its India venture is seen as another positive move as the proceeds from the sale is expected to enable the conglomerate to reduce the debts of its 3G mobile operations. Hutchison Whampoa, with interests in ports, real estate, retail, telecoms, energy and infrastructure, is facing challenges in running its telecoms businesses in general. Both its emerging market group, HTIL, and its 3G mobile business in Europe—called 3 Group—have struggled to make a profit. The sale of its India mobile business to Vodafone could lead to other potential deals with Vodafone in the European markets. Vodafone has been reported to be eyeing Hutchison's 3G operations in Europe, particularly its U.K. and Italian operations. Vodafone's chief executive, Arun Sarin, has suggested that biting price competition in the U.K. mobile market will force some players out, leading inevitably to a consolidation in the mobile market. He previously admitted that if 3 UK was to become available, Vodafone would register its interest (see World: 22 November 2006: Speculation Deepens on Hutchison Whampoa's Possible Sale of the 3 Group).
• Vodafone's Strategy in High-Growth Emerging Markets: The acquisition of Hutchison Essar, India's fourth-largest mobile operator by subscribers, is in line with Vodafone's new strategy of shifting its focus to fast-growing markets where there is still room for growth. The company has quit the Swedish, Japanese, Belgian and, lately, the Swiss markets, while boosting its presence in Turkey, South Africa, Kenya, India and China. Having failed to boost its stake in India's leading mobile company, Bharti, beyond its present 10% stake, an opportunity to take control of an equally successful Indian operator was too good to be missed. Although the price tag is by no means cheap and Vodafone has in the past been accused by its shareholders of overpaying for acquisitions, the acquisition of Hutchison Essar is expected to be welcomed by most of its shareholders, given the expectation that the deal will give the British mobile giant a strong foothold in one of the world's fast-growing mobile markets. While six million new phone users sign up to mobile services in India every month, only 13% of the population are mobile phone users, which makes it potentially hugely lucrative compared with developed Western markets. In addition, the performance of its Turkish unit, Telsim, has showed that Vodafone has a good track record of achieving growth in emerging-market businesses. Nevertheless, Vodafone will see intense competition in India's already over-crowded mobile market, particularly from leading player Bharti and second-placed Reliance Communications, which was also bidding for control of Hutchison Essar.