Vodafone Hopes to Complete Hutchison Essar Deal in Two Months

"We are in the process of acquiring the company (Hutchison Essar) and it should be done in two months or so," Sarin told reporters at a press conference in New Delhi today. The British mobile giant announced on Sunday that it would buy the 67% stake in Hutchison Essar held by Hutchison Telecommunications International Ltd. (HTIL) for US$11.1 billion (see India: 12 February 2007: Vodafone Wins Control of Hutchison Essar with US$11.1-bil. Bid).

Sarin said that Vodafone wants India's Essar Group, which currently holds the remaining 33% stake in Hutchison Essar, to remain its partner. Sarin added, however, that if Essar indeed wanted to exit from Hutchison Essar, Vodafone would offer to the Essar Group the same terms it offered HTIL. He said Essar has about a month to decide whether it wants to stay invested in Hutchison Essar. Sarin also said that the Essar Group's "first right of refusal" is not valid when a foreign company, such as Vodafone, acquires HTIL's stake. The comment follows speculation in the local media that HTIL was obliged to offer Essar, under a shareholders agreement between them, the opportunity to match the best price offered by any other company for HTIL's stake.

Sarin also said in New Delhi that Vodafone would retain Hutchison Essar's current chief executive, Asim Ghosh, after it takes control of India's fourth-largest mobile operator. Asim Ghosh and Indian entrepreneur Analjit Singh are HTIL's existing local partners, who together hold 15% in Hutchison Essar, while HTIL's direct stake is 52%. Vodafone said after winning the deal that the two minority shareholders had agreed to retain their holdings and become its partners. Vodafone said its interest would be 52% following completion and it would exercise full operational control over the business. Vodafone added that if Essar decides to accept Vodafone’s offer, these local minority partners among them would increase their combined interest in Hutchison Essar to 26%, as foreign shareholding in Indian telecommunications firms is currently capped at 74%.

Outlook and Implications

• Vodafone Paying for Future Growth: Vodafone beat India's Reliance Communications, the Hinduja Group, as well as Essar itself in the bid battle with an offer that gives Hutchison Essar an enterprise value of US$18.8 billion. The acquisition, which will help Vodafone gain a sizeable presence in one of the world's fastest-growing mobile markets, has been generally well received by Vodafone's investors, although some have said the company paid too much. Although the price paid by Vodafone is by no means cheap, the British mobile giant is paying for the future growth potential of Hutchison Essar. India, with more than 1.1 billion people and net monthly additions of over 6 million customers, 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 is mobile phone users—indicates huge growth potential compared with developed Western markets. Hutchison Essar, currently the fourth-largest mobile operator in the country, will give Vodafone a strong foothold in the market. Hutchison Essar 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.
• Plans to Boost Market Share in India: Vodafone plans to increase Hutchison Essar's market share in India significantly. It expects mobile penetration in the country to exceed 40% by 2012 and is targeting a 20.0-25.0% market share within the same timeframe, from 16.4% at end-2006. In addition to accelerated network investment, the infrastructure sharing arrangement between Vodafone and Bharti Airtel—the country's largest mobile operator at present—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 yesterday 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. Therefore, Vodafone's entry into the Indian market might fuel competition not only in the call charges and network coverage, but also in the handset market.

• Strategy in High-Growth Emerging Markets: 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. Sarin, who has been trying to boost Vodafone's exposure to higher margin emerging markets to drive growth, said Vodafone remains on the lookout for more acquisition opportunities, although no deals are imminent. "This (the Hutchison Essar deal) is a big one. We need to make sure we digest this," he said, adding that future acquisitions will be in Africa and parts of Asia and Eastern Europe. Although Vodafone has in the past been accused by its shareholders of overpaying for acquisitions, the gains in its shares in recent months and Sarin's success in winning the Indian deal without getting drawn into a protracted bidding war will help ease shareholders' criticism of the company's strategy.