Friday, February 23, 2007

Vodafone's Hutch purchase

Vodafone has come out as a winner in acquiring the stake in Hutch held by HTIL, Hong Kong. HTIL is a publicly listed company which invests in various telecom companies across the world. Main shareholder of HTIL is Hutchison Whampoa group of Li-Ka Shing.

HTIL and Essar group of India have 67% and 33% respectively in Hutchison Essar Ltd. which runs mobile phone services across India under the brand Hutch. Hutch is one of the leading mobile phone companies in India, at the fourth position in terms of subscriber numbers after Bharti, Reliance and govt. owned BSNL.

About three months back, HTIL surprisingly decided to pull out of the venture and put up its stake for sale. The Indian operation amounts to a significant part of HTIL. Apparently HTIL felt that the telecom investments were turning out to be quite high in the competitive Indian environment. I think the main reason is HTIL's relationship with Essar which was going nowhere.

Hutchison Essar was supposed to go to the stock markets but that didn't happen because of internal fight between HTIL and Essar. The required investment for further growth could have easily come from the stock markets. The enterprise value at which Vodafone has acquired the stakes is about 18 billion USD or about Rs. 81,000 crores. A dilution of around 15% would have resulted in well over 10,000 crores from the markets for further investment. (This is the kind of number Vodafone is indicating it will spend. Bharti too will be spending only of this order.)

Essar is a difficult company to understand. Suddenly it seems to be flush with cash. It is into shipping, steel, telecom and what not. Essar even suggested that it will buy the 67% from HTIL. It still seems to claim it has matching rights to the stake held by HTIL, and if Vodafone doesn't agree to certain terms for the new shareholder agreement, Essar may invoke the matching rights clause or fight a legal battle. HTIL claims there is no matching rights clause in the shareholder agreement!

Vodafone may find dealing with Essar a difficult proposition. Essar does not seem to have a clear telecom strategy or the money and capability to execute on plans. If at all possible, Vodafone should try to buy out Essar completely, find some financial investors in India, and go IPO in Indian stock markets (since there is a limit of foreign holding in telecom companies in India).

Besides Bharti and Reliance Infocomm which are listed, Idea (of Aditya Birla group) has just now listed. Spice Telecom (operating in Karnataka and Punjab) has filed a draft red herring prospectus. BSNL, after a merger with MTNL, may also list.

Vodafone's purchase would also mean a complete rebranding. Hutch as a brand will go completely out of the country and Vodafone will enter India (and in my handset too!).

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