Mumbai: Essar Group, a one-third owner of Indian mobile phone company Hutchison Essar, has been given three weeks to decide whether it wants to stay invested in the Mumbai-based company or sell out to British acquirer Vodafone Group, said sources close to the transaction. On stake is an offer for $6.2 billion.
If the oil-to-steel conglomerate decides to sell out to Vodafone, the acquirer has lined up support from Delhi-based businessman Analjit Singh, already a minority shareholder in Hutchison Essar, to pick up the Indian portion of Essar’s equity.
Essar owns 22% in the Mumbai cellular company through foreign-registered investment firms and 11% directly via its Indian units. An Essar spokesman confirmed the group was weighing its options on the Vodafone offer.
“I have an in-principle understanding with Vodafone that if the opportunity comes up for additional ownership, I’d be open to such an option,” Singh, who owns 10% equity of Hutchison Essar, told Mint. Another 5% is owned by Hutchison Essar’s CEO Asim Ghosh.
Both Singh and Ghosh own the stakes as representatives of Hutchison Telecommunications International Ltd or HTIL, the Hong Kong parent of Hutchison Essar.
“If Essar decides to accept Vodafone’s offer, these local minority partners, between them, will increase their combined interest in Hutchison Essar to 26%,” Vodafone said in a regulatory filing in London.
Berkshire, England-headquartered Vodafone on Sunday offered $11.1 billion in cash for a 67% stake, including the stakes of Singh and Ghosh, in Hutchison Essar held by HTIL.
The deal translates into a pre-tax profit of $9.6 billion for HTIL, part of the Hutchison Whampoa group controlled by Li Ka-shing.
HTIL invested a total of $1.5 billion by way of direct equity and contributions to finance its minority partners’ stakes in India.
Losing bidder Reliance Communications said it planned to continue with its plan to invest Rs 11,000 crore in network expansion next financial year. “Reliance’s bid was made in line with our publicly declared and consistent philosophy of sustainable value creation, and financial conservatism,” Anil Ambani, the company’s chairman said in a release.
Vodafone has set itself aggressive targets to grow in India through the Hutchison Essar acquisition. Vodafone chief executive Arun Sarin told analysts and investors on a conference call that he aims to increase Hutchison Essar’s market share to between 20% and 25% by 2012 from 12% today.
Consequently, the contribution of profits, measured by Ebitda or earnings before interest, tax, depreciation and amortization, from emerging markets eastern Europe, Middle East, Asia Pacific and Africa, will increase to a third by fiscal 2012 from below a fifth in the year to March 2007.
Yet, some investment houses said Vodafone had overpaid. Macquarie Securities said Vodafone’s offer valued Hutchison Essar at a forward enterprise value to Ebitda multiple of 16.4 times. Larger rivals Bharti and Reliance Communications trade at about 13.6 times and 11.7 times.
Vodafone’s chief executive of the emerging markets Paul Donovan said in a presentation on the analyst call that the company expected to transition to a “dual brand”, which local sources said would be Vodafone-Hutch, in the short-term and then eventually move to the Vodafone brand of services in India. No time frame was set for this transition.
The Hutchison Essar deal is crucial to Sarin who is fighting minority investors accusing him of overpaying for acquisitions and not delivering results. In February 2004, Sarin lost a battle to win control of US mobile carrier AT&T Wireless to a $41 billion bid from Cingular Wireless.
Then, last February Vodafone announced an asset write-down of more than $45 billion, leading the group to report the biggest-ever loss by a European company three months later.
He signalled his interest in India, the fastest-growing telecom market in the world, by picking up a 10% stake in Bharti Airtel, India’s biggest mobile phone services firm.
That stake is being pared down with a deal to sell 5.6% to the Mittals, the Bharti group’s promoters, for $1.6 billion.
With nearly 150 million cellular customers, the penetration of mobile phones in India at 13% is considered low compared with China’s 41% and Brazil’s 54%.
Santosh Menon of Reuters contributed to this story