Hutch-Essar battle: Odds favour Vodafone, Reliance Comm

Hutch-Essar battle: Odds favour Vodafone, Reliance Comm
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First Published: Fri, Feb 09 2007. 12 03 PM IST
Updated: Fri, Feb 09 2007. 12 03 PM IST
The battle for India’s Hutchison Essar will probably come down to a shoot-out between Vodafone’s Arun Sarin and Reliance Communications’ Anil Ambani.
Sarin has been unlucky in deals—notably his attempt shortly after he took the reins at Vodafone to buy AT&T Wireless in 2004 and establish a strong position in the US, his adopted country. An Indian by birth, he now has a chance to establish Vodafone in his native country.
Anil Ambani already controls Reliance Communications, India’s second largest mobile group with a market share of 21%. If he can take over Hutchison Essar, with its 16% market share, he will be the undisputed king of Indian telecom —with a market share of 37%.
The cost savings from crunching together two local networks would be significant. The net present value of the synergies has been guesstimated by outsiders at about $3bn. Reliance, which uses slightly quixotic CDMA technology, would also gain an easy route to upgrade its network to the more standard GSM technology.
The contest won’t be won on industrial logic alone. Politics, dynastic rivalry and legal manoeuvring will loom large.
The most complex concerns the Ruias and their Essar group. Their official position is that they want to own the whole of Hutchison Essar. As existing partners (they own 33%), they also claim that their shareholder agreement with HTIL gives them the right of first refusal if the Hong Kong group sells.
But there are doubts about the Ruias’ position. First, can they really afford to buy the whole of Hutchison Essar? Then there’s the question of what Essar’s shareholder agreement with HTIL actually is.
Vodafone doesn’t seem to want to exploit this potential weakness—in part because it recognises that the whole issue could get messy and that it might not be wise, as a foreign company, to get bogged down in the Indian court system .
Ambani, a politically well-connected local, appears to be taking a more belligerent tone. Buying only 67% of Hutchison Essar could suit him quite well as that would cut the purchase price to say $11bn. Given that neither Hutchison Essar nor Reliance has much debt, the whole cost could comfortably be funded by loading borrowings on the combined group’s balance sheet. After all, the combined group’s ebitda this year is estimated at about $3bn.
Here, though, another complexity enters the picture. Under Indian law, one mobile group cannot own more than 10% of another mobile group— unless it owns the full 100%. How then could Ambani buy only 67%? Reliance seems to think it could find a way round.
Another Indian mogul, Sunil Bharti Mittal, also has a role in the battle. Vodafone—which owns 10% of Bharti Airtel— has a non-compete clause in its agreement. To take over Hutchison Essar, Sarin would need to get Mittal to waive the clause. He would also probably need to sell back his stake in Bharti, which currently has a market value of $3.3bn. This potentially gives Mittal the ability to hold Sarin to ransom.
Is it really in Mittal’s interest to hobble Sarin so badly that Ambani wins the battle? Maybe not. After all, Mittal is currently top dog of Indian telecoms. Mittal could even have an interest in helping Sarin win. If so, the most practical thing he could do —apart from waiving the non-compete clause—would be to agree to share networks.
Given the issues that could affect the contest, it is still too close to call. The only thing clear is that there will be at least one very disappointed bidder.
breakingviews.com
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First Published: Fri, Feb 09 2007. 12 03 PM IST
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