The bidding war is heating up for Hutchison Essar, India's fourth largest cellular company. Britain's Vodafone Group kicked off the scramble last month when it signaled interest in acquiring the Indian affiliate of Hong Kong-based Hutchison Wampoa.
Since then, the list of potential buyers has grown to include India's second-largest mobile operator, Reliance Communications, and Indian conglomerate Hinduja Group. Even Essar Group, which currently owns one-third of Hutchison Essar, may make a bid.
It's easy to see why everyone wants in-and why the rumored price tag has climbed into the range of $18 billion to $20 billion. Although China is the world's largest mobile-phone market, with nearly a half-billion customers, India recently overtook it as the world's fastest-growing. More than six million new users signed on in India in December alone.
The country's six main mobile operators now share 150 million customers, nearly double the number a year earlier. But with India's population topping 1.1 billion, that translates to penetration of just 14%. Market researcher Gartner figures the customer base should double again by 2010.
Holding on to Airtel
For Vodafone and its India-born chief executive Arun Sarin, the stakes have never been higher. With growth slowing in its core European markets, the world's largest wireless operator is turning, as never before, to developing economies.
The company figures its revenues from emerging markets will grow at an annualized rate of more than 12% between now and 2010, vs. just 4% annual growth in Europe, where penetration is near saturation.
Vodafone already owns a 10% stake in India's No. 1 mobile operator, Bharti Airtel. But the British giant doesn't stand a chance of taking majority control because Bharti's main shareholders aren't selling. Instead, Vodafone is expected to divest its Bharti stake to acquire Hutchison Essar, whose primary owner is selling out to fund other ventures.
"With limited growth prospects in Vodafone's core European markets, Sarin's No. 1 job right now is to convince investors that he has a viable long term growth strategy," says John Delaney, principal analyst at telecom consultancy Ovum in London. "And gaining control of a fast-growing operator in India is the best opportunity he has to do it."
Growth in Foreign Ownership
Hutchison Essar is well-positioned to capitalize on India's growth. The company now has 23 million subscribers and a 17% market share. And in November it received six new telecom licenses, widening its coverage to 22 of India's 23 regions.
If Sarin snags Hutchison Essar at a reasonable price it would give a badly needed boost to his credibility, which was damaged when he tried-and failed-to buy AT&T Wireless for $38
But securing Hutchison Essar won't be easy. Vodafone isn't expected to face any problems from the Indian government, which last year relaxed regulations limiting foreign ownership in telecom companies from 49% to 74%; but it faces stiff competition from some of the most powerful business leaders in India, such as Anil Ambani, chairman of Reliance Communications, and the Ruia brothers behind Essar.
Sarin went to India last week to push the deal, but shortly after his meetings with Indian officials, the board of Reliance authorized Ambani to raise funds and "take all necessary steps" to counter Vodafone. Reliance is said to have the support of a consortium of private equity investors including Blackstone Group. Blackstone Group declined to comment.
Roadmap for Targets?
Meanwhile, Essar claims it has the right to match any offer for Hutchison's two-thirds stake in their joint venture, including one from a foreign bidder. Yet Hutchison insists the right extends only to offers from Indian companies.
Analysts reckon that Essar's ultimate aim is to win control of the entire business, then sell part of it to a partner, potentially Vodafone. For its part, Vodafone has said it is open to partnering with Essar or another local player.
The biggest risk, investors fear, is that Vodafone will overpay. Institutional investor State Street, which holds about 1.7% of Vodafone, says the telco must adhere to new acquisition criteria set out last year.
At the time, Sarin promised that any acquisition would deliver, within three to five years, an investment rate of return two percentage points higher than the local, risk-adjusted cost of capital. Vodafone has yet to elaborate on how that target will be met.
No question, the purchase price is high. If it reached $20 billion, that would equal $900 per subscriber, says Ovum's Delaney. But he notes that such metrics are more useful to assess potential deals in Europe than in fast-growing emerging markets such as India.
"Here, you are not just buying an existing customer base," Delaney says. "Instead, you are buying the opportunity to reach people who don't even have a mobile phone yet."
Restoring a Reputation
Indeed, many analysts and investors accused Vodafone of overpaying when it plunked down $4.5 billion in December, 2005, to buy out Turkey's Telsim Mobil Telekomunikasyon. At 35 times earnings, the deal looked wildly expensive, especially considering that Vodafone reckoned it would have to spend another $1 billion to turn the ailing company around.
Just one year later Vodafone says its Turkish business is now self-funding. By defying skeptics and turning the business around more quickly than anticipated, Vodafone has reduced the multiple to a forecast 11 times earnings for 2007.
For Sarin, acquiring an even more important strategic asset such as Hutchison Essar might finally silence his critics. More importantly, it would restore Vodafone's reputation for growth.
With Nandini Lakshman