Global Insight Perspective | |
Significance | Under the terms of the partnership, Vodafone will have operational control of the Indian mobile operator. Hutchison Essar will be renamed Vodafone Essar. |
Implications | The agreement between the two parties signals the removal of a potential hurdle in Vodafone's attempt to gain control of Hutchison Essar. |
Outlook | Essar's local knowledge could complement the strengths of Vodafone, which is aiming to enable Hutchison Essar to become the leader in the Indian mobile market. Essar will have an option to sell its 33% shareholding in Hutchison Essar to Vodafone for US$5 billion. |
Vodafone today announced in a company statement that it has reached an agreement with India's Essar Group (Essar) under which the two companies will work to continue the growth of Hutchison Essar, India's fourth-largest mobile operator. This follows Vodafone's announcement on 11 February 2007 that it had agreed to acquire Hutchison Telecommunications International Limited's (HTIL) 67% controlling interest in Hutchison Essar, in which Essar is and will continue to be a 33% shareholder (see India: 12 February 2007: Vodafone Wins Control of Hutchison Essar with US$11.1-bil. Bid).
The partners have agreed that Hutchison Essar will be renamed Vodafone Essar and, in due course, that the business will market its products and services under the Vodafone brand. Under the terms of the partnership, Vodafone will have operational control of Vodafone Essar and Essar will have rights consistent with its shareholding, including proportionate board representation. Ravi Ruia, a member of the family that controls Essar, will be appointed as chairman of Vodafone Essar, while Vodafone’s chief executive, Arun Sarin, will be vice-chairman. Hutchison Essar's current chief executive, Asim Ghosh, will stay on as chief executive.
Essar will have certain liquidity rights including, between the third and fourth anniversaries of completion, and subject to regulatory requirements, an option to sell its 33% shareholding in Vodafone Essar to Vodafone for US$5 billion or an option to sell between US$1 billion and US$5 billion worth of Vodafone Essar shares to Vodafone at an independently appraised fair market trading value.
Vodafone said it expects to complete the acquisition of HTIL's interest in Hutchison Essar in the coming weeks.
Outlook and Implications
- Removal of Potential Deal Hurdle: The agreement between the two parties signals the removal of a potential hurdle in Vodafone's attempt to gain control of the Indian mobile operator. HTIL's decision to sell its stake in Hutchison Essar to Vodafone was initially not taken well by Essar, which itself had wanted to buy the 67% stake. Vodafone had offered to buy Essar's 33% stake in Hutchison Essar at the same terms it offered HTIL, but the Indian group is apparently keen to stay on for the time being, believing there is still substantial growth potential in the Indian mobile market. With more than 1.1 billion people and net monthly additions of over 6 million customers, India is on track to become the second-largest mobile market in the world after China. The fact that mobile penetration is still low—about 13% of the population—indicates large room for growth compared with developed Western markets.
- Plans to Boost Market Share in India: The acquisition of Hutchison Essar is in line with Vodafone's new strategy of shifting its focus to fast-growing markets where there is still room for growth. Hutchison Essar, currently the fourth-largest mobile operator in the country, will give Vodafone a sizeable presence in the market. The operator had 23.3 million mobile customers at the end of 2006, equivalent to a 16.4% market share. It has a nationwide presence with recent expansion to 22 out of 23 licence circles. Vodafone expects mobile penetration to exceed 40% in India by 2012 and hopes to take Hutchison Essar to the top market position, aiming to increase its market share to 20.0-25.0% by 2012 from 16.4% at end-2006.
- Various Growth Measures: Essar's local knowledge could complement the strengths of Vodafone, which has the ability to bring an extensive range of products and services, many of which are not currently available in India. The British mobile giant has also entered an infrastructure sharing arrangement with the leading Indian mobile operator, Bharti Airtel, which is expected to help Vodafone reduce network costs, especially in rural areas, enabling it to expand network coverage more quickly. Vodafone may also leverage its agreement with China's ZTE Corp to bring Chinese-made low-cost mobile handsets into India under its own brand. Vodafone had earlier announced a handset procurement agreement with ZTE, under which the Chinese firm would produce a range of Vodafone-branded low-cost handsets for sale across various markets.