The bidding began in early December when reports first emerged that private equity groups were on the hunt to acquire telecom assets in India, including the 67% Hutchison Essar stake held by Hutchison Telecommunications International Ltd, the telecoms arm of Hong Kong conglomerate Hutchison Whampoa.
Just before Christmas Vodafone confirmed it was interested in the stake, despite the fact that the Newbury, UK-based operator had re-entered the Indian market in October 2005 when it paid INR 67bn ($1.49bn) to acquire a 10% stake in Bharti Tele-Ventures Ltd, India’s largest mobile operator. This followed Vodafone’s exit from India in June 2003 when the UK operator sold its 20.76% stake in RPG Cellular to Indian mobile phone group Aircel because it did not give Vodafone a strong enough position in the market.
But Vodafone under chief executive Arun Sarin quickly realized that the mature and saturated western market could not offer the type of growth levels that Vodafone needed, and about 18 months ago Sarin began a policy of acquiring assets in developing markets, notably in Turkey, South Africa, Egypt and India, while exiting crowded markets in Sweden, Switzerland, and Belgium.
India is often described as one of the world’s fast growing mobile markets, with an average of 6.5 million new subscribers being added every month. It has a population of 1.1 billion but mobile penetration rates of only 13%, compared to 40% in China.
Hutchison Essar has a presence in 22 out of 23 license areas in India. At the end of the year it had 23.3 million customers, equivalent to a 16.4% nationwide market share.
In January Sarin visited both Hong Kong and India, meeting various company officials and government ministers, as the world’s largest mobile operator sought to bring to bear its considerable financial and business muscle on acquiring the Indian stake.
It was competing against the likes of India’s second-ranked GSM operator, Reliance Communications Ltd, The Essar Group, which holds the other 33% stake in Hutchison Essar, as well as The Hinduja group.
The first round of bids were submitted and on Sunday evening, the board of Hutchison Telecom in Hong Kong informed Vodafone that it had won the bidding.
Under the terms of the deal, Vodafone International Holding BV announced it would pay $11.1bn in cash for the 67% stake, and assume debt of $2bn, giving Hutchison Essar an enterprise value of $18.8bn. Suggested prices for the stake had been between $15bn and $20bn.
In marked contrast to Vodafone’s failed $40bn attempt to acquire AT&T Wireless Service Inc in 2004, Sarin has worked very hard both to keep Vodafone shareholders on side, as well as convince Indian ministers and Hutchison Telecom officials that Vodafone was the best recipient for the stake.
Vodafone is stressing that the acquisition meets its stated financial investment criteria, and Sarin is predicting returns of 14% per year.
This announcement is clear evidence of how we are executing our strategy of developing our presence in emerging markets, said Sarin. We have concluded this transactions within our stated financial investment criteria.
The markets reacted well to the news, with Vodafone shares up 1.68% to 151.75 pence ($2.95) on the London Stock Exchange on Monday.
Likewise, analyst opinion was positive. John Delaney, principle analyst at Ovum, was clear on the deal. Vodafone needed control of an operator in India, and increasing its stake in Bharti was not realistic, he said. The price is reasonable, not outrageous, and Sarin has maneuvered Essar very nicely. This last comment refers to two notable issues with the Essar deal that Vodafone has had to overcome. The first deals with Indian law, which only allows a foreign investor to own a maximum of 74% in a local company. But the second and perhaps more important issue is that Essar, which has a 33% stake in Hutchison, claims that it had first rights to the 67% stake.
Vodafone obviously does not think that Essar has a valid legal position here, and said it would make any offer to buy Essar’s 33%. It remains to be seen whether Essar launches a legal bid to stop the deal. Vodafone also believes that its arrangements with other existing minority partners who control 15% of Hutchison Essar will result in a post-acquisition shareholder structure that will meet India’s foreign ownership rules.
Meanwhile, Vodafone said it has entered into an agreement with Bharti regarding a comprehensive range of infrastructure sharing options in India between Hutchison Essar and Bharti. This is similar to agreements that Vodafone has with Orange SA in Spain and the UK that allow both operators to reduce infrastructure costs, especially in rural areas, by sharing network infrastructure.
Vodafone also said it has granted the Bharti group an option, subject to completion of the Hutchison Essar deal, for it to acquire 5.6% of Vodafone 10% stake in Bharti for $1.6bn. Vodafone will retain a 4.4% stake in Bharti.
Vodafone said that mobile penetration in India will exceed 40% by 2012, and it is targeting a 20% to 25% market share, helped by expanding its distribution and network coverage, and lowering its total cost of network ownership. About one third of Hutchison Essar’s current sites are already shared with other Indian mobile operators, and Vodafone is planning to increase this to two-thirds of total sites in the long term.
The transaction is expected to close in the second quarter, subject to Indian regulatory approval.
