The world’s biggest mobile phone company, Vodafone Group, moved a step closer to acquiring a controlling 67% stake in Hutchison-Essar, India’s fourth-largest cellular telephony company.
On Thursday, the company signed a shareholder agreement with local partner Essar Group, which owns 33% of Hutch-Essar, and sighted regulatory approval in two weeks.
Last month, Vodafone agreed to buy 67% in Hutchison Essar for $11.1 billion in cash, buying out the Hutchison Telecommunications International Ltd (HTIL) stake in the Indian venture. The deal has been approved by HTIL shareholders. Essar has got a sweetheart deal from Vodafone.
The Mumbai-based business group will have an “put option” to sell its 33% stake in the phone firm for at least $5 billion (Rs22,100 crore), not including any debt liabilities, between the third and fourth years of the deal.
Separately, HTIL will pay Essar $373.5 million on completion of the stake sale to Vodafone, and a further $41.5 million within two years, the Hong Kong company said in a statement.
Both partners will have the first right to buy each other’s equity, should either of them decide to sell, heads of the companies said. “We don’t think the valuation of the company (after three years) is going to be anywhere near that ($5 billion), it will be much higher. The option is only to protect against any downside,” Essar Group’s vice-chairmanRavi Ruia told reporters.
India’s central bank is studying representations and documents from Vodafone, HTIL and the Essar Group on the foreign ownership in Hutchison Essar. The Reserve Bank of India’s reply to the government will be put before the Foreign Investment Promotion Board, which approves foreign investments in some sectors. The board will then take a decision on Vodafone’s India plans.
Commerce and industry minister Kamal Nath called the deal a “win-win” for India and Vodafone after a meeting with Ruia and Arun Sarin, chief executive of Vodafone.
The proposed deal ran into rough weather with a non-governmental organization alleging in a Delhi court that the foreign holding in Hutchison Essar exceeded the 74% ceiling mandated by the government. About two-thirds of Essar’s 33% ownership of Hutchison Essar is owned through foreign investment companies controlled by the Indian group’s promoters, the Ruias.
Vodafone is acquiring HTIL’s foreign equity stake of around 52% and another indirect stake of 15% held by two individuals—Hutchison Essar chief executive Asim Ghosh and New Delhi businessman Analjit Singh—in Hutchison Essar. The 15% ownership, the NGO says, is foreign since it will represent Vodafone.
Analysts said the Ruias did not want to reap gains from their telecom investment just yet. “Though under the terms of the agreement with HTIL, Essar would have been able to sell their stake for a higher amount, they seem to have their interest set on the longer term valuation,” said Vishal Malhotra, partner at auditor Ernst & Young’s India offices.
The takeover of Hutchison Essar will expand Vodafone’s worldwide subscribers by 8.4% but increase its revenues by just 3.33%, given that Indian mobile-phone customers pay as less as Rs350 a month—just a fifth of European billings.
Investors are worried whether the firm will be able to achieve its operational targets for India. “What everyone is looking forward to is how Vodafone intends to move from No.4 to No. 1 (in India) and capture 20-25% they are talking about,” said Damien Chew, European telecom analyst for ING Equity Markets in London.
Vodafone’s revenues for fiscal 2007, ending 31 March, is expected at nearly $60 billion and Ebitda (earnings before interest, taxes, depreciation and amortization) at $23.6 billion. Hutchison Essar reported an Ebitda of $297 million on revenues of $908 million in the first six months of 2006.
On receiving regulatory approval, Hutchison Essar will be renamed Vodafone Essar, Sarin said, ahead of phasing out the Hutch brand and replacing it with Vodafone. Ghosh will continue as its CEO.
(Mark Lee of Bloomberg contributed to this story.)