The cute little pug that stars in the popular Hutch advertisements will now run to a British whistle.
By taking control of Hutschison Essar, the Vodafone Group has bought into the world’s fastest-growing telecom market.
This purchase is part of the British telecom company’s strategy of cutting its exposure to mature markets and expanding its presence in emerging markets. It is to be seen whether its shareholders, who have been hurt by previous acquisitions that soured, benefit this time around.
There will be no such issues for the shareholders of Hutchison Telecommunications International. The current enterprise value of $18.8 billon is more than twice the $8.8 billion valuation in June 2006, when the Hindujas sold their 5.1% stake in Hutch Essar for $450 million.
Hutchison Essar’s 23 million subscribers in India add roughly 10% to Vodafone’s global subscription base. After all, Hutch Essar is India’s fourth -largest player and has a pan-Indian market share of 16%. What’s more, Vodafone has also been betting big on 3G, the third-generation mobile telephony standard that enables high-revenue data (audio and video) services, in which it has considerable expertise. Hutch Essar’s users account for an estimated 20% of mobile connections in Delhi and 25% in Mumbai, two key markets in the country. Hutch’s premium brand image and the highest average revenues per user (ARPU) among all domestic telecom companies, also work as positives for the new entity’s 3G initiatives, since the new 3G services will initially be used largely by top-end urban consumers.
That Vodafone has won Hutch Essar without a protracted bidding war and at a price under the expected number of around $20 billion works as positives, too. A lengthy bidding war tends to inflate acquisition costs. And Vodafone had the historical context of overpaying on previous deals—a concern that its stakeholders had expressed earlier. But considering that Hutchison Essar may be the only company among the major telecom assets that may be available on block for some time, criticism of the valuation seems unlikely.
In keeping with Indian regulatory requirements, Vodafone will offload its 5.6% direct stake in Bharti Airtel to promoter Sunil Mittal’s group, but will still hold an indirect 4.4% stake, as a financial investor with no representation on the latter’s board nor any management rights. At the same time, its plan to share network infrastructure with Bharti is strategic, since this would mean lower costs and higher profitability from operations and scale economies. Bharti, which is India’s top mobile operator, and Vodafone plan to work on synergies in infrastructure sharing, roaming and long-distance services.
In a market that could well be the showcase for India’s reform story—telecom—the future seems bright. The sector has been one of the fastest-growing markets in the economy in recent years, thanks to the rationalization of policies aimed at making these pro-business and pro-market that has promoted healthy competition. Which has meant both lower tariffs and lower cost of handsets, making mobile telephony affordable to the common man. Teledensity is up from 6.6% in 2003 to 17% in 2006, mainly on the back of growth in India’s wireless subscriber base.
While this pace of growth is remarkable, equally appealing to market players is the latent demand in India—inherent in its “very significant” working population market with ever- increasing disposable incomes as well as in the fact that penetration is far below other comparable markets such as China.
What does this deal mean for other big players in the market? Certainly a setback for the plans of Reliance Communications, which has ambitions to gain a very strong foothold in the GSM segment of the mobile market, given that its presence is predominantly in the not-so-popular CDMA band. For Bharti, which was never in the race to bid, cost-saving synergies with Vodafone seem the way ahead for greater business gains.
Essar, which owns the balance 33% stake in Hutch, has to either opt for its RoFR, that is, right of first refusal, and match the top bid, or tag along right (to sell its stake at the same price offered to HTIL). It has been asked by Vodafone to continue as a partner, as the former cannot in any case own more than 74% stake.
It’s worth watching if Essar may sell and redeploy its funds to expand its other business interests or stay and tap the telecom growth story.
What does Vodafone’s purchase of Hutchison Essar stake imply? Your comments are welcome at firstname.lastname@example.org