Vodafone Considers Bidding for Hutchison Essar Control

Vodafone today confirmed recent speculation regarding its potential acquisition of India's Hutchison Essar. "The Board of Vodafone continues to believe the mobile market in India has great potential and is therefore considering the acquisition of a controlling interest in Hutchison Essar," said the company in a statement. "Such a transaction would be consistent with its stated strategy of seeking selective acquisition opportunities in developing markets." The company added that, "the process is at an early stage and may or may not lead to a transaction."

Hutchison Telecommunications International Ltd. (HTIL) today also stated that it has been approached by various potentially interested parties regarding a possible sale of its equity interests in Hutchison Essar. The company added that no agreement in respect of any such possible sale has been entered into. It also reiterated that there was no assurance that a sale may result from these approaches.

Hutchison Essar is 67%-owned by HTIL, part of the Hong Kong-based conglomerate, Hutchison Whampoa. The rest is owned by Essar, a diversified Indian conglomerate—with shipping, steel and oil interests—controlled by the Ruia family. Hutchison Essar is India's fourth-largest mobile operator, with a market share of 15.6% at the end of June this year. The operator saw its mobile subscriber base more than double to 20.36 million in the twelve months ending 30 September 2006 and is adding nearly a million new subscribers a month.

Reliance Communications, India's second-largest mobile operator, is also reported to be ready to bid for Hutchison Essar, but is waiting for Vodafone to make the first move. Reliance, which is controlled by the Anil Ambani group, "will open its cards only after Vodafone makes the first move and puts a value to the lucrative India business of the Hong Kong-listed HTIL", the Economic Times newspaper quoted unnamed sources as saying. Earlier media reports said Reliance Communications was likely to team up with private equity group Blackstone to bid for Hutchison Essar. An acquisition by Reliance Communications would put it solidly at the top of the industry, with a market share of about 35%. Local newspapers have also said that Malaysia's Maxis Communications—which last year bought 74% of the Indian mobile operator Aircel—and Egypt's Orascom Telecom were also potential suitors for Hutchison Essar.

Outlook and Implications

• Rationale for Hutchison Selling: Hong Kong-based conglomerate Hutchison Whampoa, headed by billionaire Li Ka-shing, has a history of building up a business and selling it on when the company attains a good value. This time, there are multiple incentives for the company to sell its most lucrative telecoms business in the fast-growing Indian market. Firstly, the valuation of Hutchison Essar is high. Although the potential bidders are yet to make their offers, it is estimated that the offers could be over US$13.5 billion. Secondly, Hutchison Whampoa needs money to repay debts after HTIL failed to take its Indian unit public. Thirdly, the management tensions between HTIL and Essar are apparent—which has led HTIL to drop a long-planned initial public offering (IPO) of Hutchison Essar. In addition, 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. Last year, Hutchison Whampoa sold a 19.3% stake in HTIL to Egypt's Orascom Telecom for US$1.3 billion. During April, Orascom subsequently raised this stake to 23%. According to Reuters, the leading Middle Eastern mobile operator also said, in October, that it was in negotiations with Hutchison Whampoa to increase its stake even further, with a view to achieving either a full take-over or to take a controlling stake in HTIL (see Middle East and North Africa: 17 October 2006: Orascom Seeks Controlling Stake In HTIL and Global: 22 December 2005: Orascom Moves East with Strategic HTIL Stake). In Europe, Hutchison Whampoa's 3 Group is also reported to have been eyed by its competitors, including France Telecom and Vodafone. Although Hutchison Whampoa has insisted that it will not sell 3 Group, there can hardly be any justification not to sell if its recently launched X-Series mobile broadband strategy flops (see World: 22 November 2006: Speculation Deepens on Hutchison Whampoa's Possible Sale of the 3 Group).
• Issues Other than Price: Although the war over Hutchison Essar is set to be expensive, price is not the only factor to be taken into consideration. As Indian regulations restrict foreign ownership of Indian telecoms companies to 74%, Vodafone would have to team up with Hutchison Essar or find another local partner, which could be difficult given the cost of the remaining stake. Vodafone would also have to figure out what to do with the 10% stake it already owns in India's largest wireless operator, Bharti Airtel, which it acquired in late 2005 for US$1.61 billion. When Vodafone signed the deal with Bharti’s owners—Bharti Enterprises and SingTel—in October 2005, it agreed to a one-year non-competition clause should it wish to exit the contract.
• The Wider Picture for Vodafone: A bid for 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. 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 a leading role in an equally successful Indian operator is too good to be missed. Put simply, India, with over a billion people and net monthly additions of over 5 million customers, is on track to become the second-largest mobile market in the world after China, and the world's leading mobile operator wants a bigger role in it. While that desire is noble, achieving it might prove less than guaranteed. Given that Reliance is committed to launching a counter-bid, the stage is set for a clash between Vodafone and Reliance. Although Vodafone is expected to have a deeper purse, worries about overpaying and strong opposition from shareholders will leave little room for it to up the ante. Reliance, with the likely backing of private equity firms, will prove far more willing to spend, and is likely to win any ensuing bidding war. In the event of that happening, memories of Vodafone's ill-fated bid for AT&T in 2004 will resurface, potentially souring the company's relationship with Bharti.