Vodafone’s Foray Into Indian Market

Presenters:
Shalinee Mattoo
Anirban Baidya
Dhiraj Shetty
Nilesh Pathak

Submitted to
Prof. Prashant Salwan
Professor of International Business
Indian Institute of Management, Indore

20th May 2010

 Table of Contents

1 EXECUTIVE SUMMARY...................................................................................................2
1.1 OBJECTIVE OF ANALYSIS...............................................................................................2
2 BACKGROUND NOTE.....................................................................................................2
2.1 VODAFONE........................................................................................................................2
2.2 HUTCHISON ESSAR LTD...................................................................................................2
3 WHY VODAFONE CHOSE INDIA—COUNTRY ANALYSIS....................................................3
3.1 ENVIRONMENTAL CLIMATE: OPPORTUNITIES AND RISKS...............................................4
3.2 GEOGRAPHIC DIVERSIFICATION VERSUS CONCENTRATION...........................................6
4 COLLABORATIVE STRATEGIES IMPLEMENTED.................................................................7
5 CONCLUSION................................................................................................................8
6 REFERENCES...............................................................................................................9

2
1 Executive Summary
“With limited growth prospects in Vodafone’s core
European markets, Sarin’s [Arun Sarin, CEO,
Vodafone Ltd., in February 2007] No. 1 job right
now is to convince investors that he has a viable
long term growth strategy. And gaining control of a
fast-growing operator in India is the
opportunity he has to do it.”11
– John Delaney, Principal Analyst
at Ovum, 2 in January 2007.
On February 11, 2007, the Vodafone Group Plc
(Vodafone), UK-based telecom company, declared
that it had finally bagged the fourth largest Indian
mobile operator, Hutchison Essar Ltd. (HEL). This
announcement ended an acquisition battle -
probably the most ferociously fought – in the
Indian telecom sector. Vodafone bought a 52%
stake in HEL for US$11.1 billion from Hutchison
Telecom International Ltd. (HTIL); 33% stake was
still held by the Essar Group (Essar). The
company was valued at US$19.3 billion. Vodafone
won the battle against other major competitors in
the fray like Reliance Communications Ventures
Ltd.7 (Reliance), Essar and the Hinduja group.2
1.1 Objective of Analysis
Through this paper, we would use a real life case
example of Hutchison Essar Ltd acquisition by
Vodafone in 2007 to describe how the principles
and concepts of country evaluation and selection,
investment, and collaborative strategies work in
the arena of international business.
1
Kerry Capell, “Why an India Deal is Vital to Vodafone,”
www.businessweek.com, January 16, 2007.
2
Adapa Srinivasa Rao, “The Hutchison Essar Acquisition:
Vodafone’s Foray into an Emerging Market,” 2008.
2 Background Note
2.1 Vodafone
Vodafone, based in the UK, was the world’s
largest mobile communications company by
revenue.3 It operated under the brand name
‘Vodafone’. The brand name ‘Vodafone’ comes
best from ‘Voice data fone’, reflecting the company’s
wish to provide voice and data services on the
mobile phones. Vodafone operated in Europe, the
Middle East, Africa, Asia Pacific, and the US. 4
The company changed its name once again to
Vodafone Group Plc on July 28, 2000. From then
onwards there was no looking back for the
telecom giant as it kept on expanding its market all
over the world.
As of December 31, 2006, the company had a
subscriber base of 198.6 million customers spread
across 25 countries in five continents.
2.2 Hutchison Essar Ltd.
HEL was one of the leading mobile operators in
India. It was the fourth largest service provider in
terms of customer numbers. HEL was a joint
venture between HTIL, and the Essar. HTIL
operated mobile services in many countries under
various brand names like ‘3’ in Europe, Hutch in
India and T-mobile in the US. It had mobile
operations in countries like Hong Kong, USA,
Europe, Macau, Israel, Thailand, Sri Lanka,
Ghana, Indonesia and Vietnam. Essar, the
minority shareholder, was an infrastructure and
services major, owned by the Ruia family. It had
interests in various sectors like Steel, Energy,
Communications, Shipping & Logistics and
Construction.5
3
“Vodafone’s Full-year Profit Dips,” www.bbcnews.com,
May 29, 2007.
4
‘Vodafone’s History,’ www.vodafone .com.
5
www.essar.com
3
3 Why Vodafone Chose
India—Country Analysis
In its Strategic Decisions Conference 2007, Andy Halford, the chief financial officer of Vodafone,
presented this India as one of the most promising emerging market for mobile phone industry. He
presented India as the 2nd most populated country which has low mobile penetration, but expectant to
increase considerably. He shared that one of the Vodafone’s key strategic objectives is to deliver strong
growth in emerging markets such as India.

Vodafone already had a good market share in other developing countries such as Egypt, Romania,
Vodacam and Turkey. It wanted to bow build on its strong track record of creating value in other emerging
markets, such as India.

4
 6

3.1 Environmental Climate:

Opportunities and Risks

The environmental climate reveals both

opportunities and risks, whose combination should
determine what action to take. Companies
consider environmental climate in a host country

6
Strategic Decisions Conference 2007 Andy Halford, www.vodafone.com

5
that can significantly affect their successes or
failures. 7
In terms of Vodafone, the host country, India,
provided both opportunities and risks for its foray
into its mobile market.
Opportunities
Some of the opportunities that Indian market
provided to Vodafone were:
 Market Size: Expectation of large market
and sales growth is probably a potential
location’s major attraction.8
According to a report published in India’s
leading daily, The Times of India, on
March 25, 2007, India was reported to
become Vodafone’s largest market. The
report suggested, “On the back of
continuing surge in the number of mobile
users, India is likely to soon surpass
Germany and the US as Vodafone's
biggest market in terms of subscribers,
although the company might fail short of
its target of becoming number one mobile
player in the country. Currently, India is
the third largest market after Germany
(30.6 million) and the US (26.2 million
subscribers) for Vodafone, the world's
second largest mobile operator in terms of
subscribers and largest in terms of
revenue.”9  Other than the obvious market
size that Vodafone was catering to
through its deal with Hutchison Essar Ltd,
the Indian mobile market also provided a
significant obsolesce and leapfrogging
of landlines. In India, the number of the
mobile phone users had overtaken the
number of landline users in October 2004
with mobile phone users reaching 44.9
7
Daniels, Radebaugh, & Sullivan, International Business
Environments and Operations, 11th Ed., 2009
8
Daniels, Radebaugh, & Sullivan, International Business
Environments and Operations, 11th Ed., 2009
9 Environments and Operations, 11th Ed., 2009
“India to be Vodafone's largest market,”
www.timesofindia.indiatimes.com, March 25, 2007
million.10 It became clear that the future
belonged to wireless and hence this
opportunity was huge enough for
Vodafone to select India for its expansion.
 Ease and Compatibility of Operations:
Companies often pare down proposals to
those countries that:
o Offer size, technology, and other
advantages
o Allow an acceptable percentage of
ownership
o Have resources they need 11
Now, considering these factors in terms of
Vodafone’s selection for India, it could be
justified that India presented one of the
most mature regulatory practices of mobile
telephony. The Indian telecom policy was
considered one of the best telecom
policies in the world. The sector was also
characterized by strong competitiveness
between players. Government of India
(GOI) brought in significant economic and
technological reforms. In 2006, GOI raised
the FDI limit in the telecom sector from
49% to 74%. This was the green signal for
many international telecom companies
who were keen to enter the Indian telecom
market. Vodafone had been eyeing the
Indian market for quite a long time. The
strong rate of economic growth in India
had led to a sharp increase in disposable
incomes among the Indian middle classes.
Vodafone had expanded in emerging
markets in Eastern Europe and Africa, and
was now looking to India. But starting a
new telecom venture in a highly
competitive Indian telecom market
10
“Mobile Phones Takeover in India,” www.bbcnews.com,
November 9, 2004
11
Daniels, Radebaugh, & Sullivan, International Business
6
 seemed formidable and so Vodafone was
keener to make an acquisition.
Vodafone only had a limited presence in
Asia. It had only a 3.3% stake in China
Mobile and a 10% stake in Bharti Airtel.
Acquiring a company of the stature of
Hutch Essar would have proved in line
with Vodafone’s plans for aggressive
expansion into emerging mobile phone
markets.
Vodafone had plans to roll out its 3G
services widely in the Indian market as the
next big drive in the telecom market would
be high speed data services. Vodafone’s
plans were to leverage on its experience
in rolling out 3G services in developed
markets.12 And interestingly at the same
time, in June 6, 2007, DoT declared that
the 3G policy of GOI would be released
very shortly. India’s defense services
indicated that they would release 42 Mega
Hertz of spectrum by the end of July. 13
The government fixed a target of 250
million subscribers by the end of 2007 and
500 million by 2010.14
All these factors together created a very
plausible opportunity for Vodafone to foray
into Indian telecom market.
Risks
Return on Investment
While making international capital-investment
decisions, companies evaluate return on
investment (ROI) as means of explaining risk
considerations in International business. In the
same purview, most investors prefer certainty to
uncertainty.15
12
Adapa Srinivasa Rao, “The Hutchison Essar Acquisition:
Vodafone’s Foray into an Emerging Market,” 2008
13
Budiputra, “India’s 3G Policy might be Announced Soon,”
www.3gweek.net, April 7, 2007
14
“3G Policy by the End of this Month: DOT,”
www.tribuneindia.com, June 6, 2007
15
Daniels, Radebaugh, & Sullivan, International Business
Environments and Operations, 11th Ed., 2009
In the case of Vodafone’s entry into Indian market
through the acquisition of Hutchison Essar Ltd,
here is the fact box of the deal as analyzed by
Reuters, London:
“Vodafone's deal gives Hutchison Essar an
enterprise value of $18.8 billion. The group will
assume a net debt of around $2 billion as part of
the acquisition.
* Vodafone has also struck a parallel deal to sell a
5.6 percent stake in India's top mobile operator
Bharti Airtel (BRTI.BO) for $1.6 billion back to
Bharti group, and announced an agreement with
Bharti to share network infrastructure in India
to cut costs.
* Hutch Essar deal to give Vodafone a pan-India
presence, over 24 million customers and an
over 16 percent market share. The business had
revenue growth of 51 percent and an EBITDA
margin of 33 percent in the six months to June
30, 2006.
* Deal increases Vodafone's presence in higher
growth emerging markets, with proportion of the
group’s EBITDA from emerging market
businesses set to increase to over 33 percent
by 2012 from 20 percent now.
* Vodafone says the deal meets its financial
investment criteria, with a return on invested
capital exceeding the local risk adjusted cost
of capital in the fifth year, and an internal rate
of return of around 14 percent.
* Vodafone says deal neutral to adjusted earnings
per share in the first year and accretive to
earnings thereafter, excluding intangible asset
amortisation. Including intangible amortisation,
deal expected to dilute adjusted earnings per
share by around 7 percent in the first year before
tapering off and becoming neutral by the fifth
year.”16
The data clearly presents that there was a good
amount of certainty on Vodafone’s investment in
Indian mobile market through its acquisition deal.
In fact, the acquisition realized Vodafone’s desire
to enter emerging markets in a big way as a
counter to the markets in developed countries that
were saturated. Vodafone had been scouting the
Indian market for a long time to find a suitable
partner to help it build a visible presence in the
16
Reuters, London.
7
fast growing Indian telecom market. Vodafone did
face some criticism with regard to the pricing of
the deal. Some critics commented that Vodafone
had paid an excessive price for the acquisition.
But, others judged it a smart move as Vodafone
gained a foothold in the fastest growing mobile
markets in the world.17
Hence, Vodafone chose to concentrate on
developing nations, especially India where the
subscriber base had grown from 10 million in 2002
to 150 million by 2007.19 India’s mobile market was
presenting an average growth of 90% year on-
year, and India had even overtaken China as the
fastest growing mobile market in the world.

Vodafone, however, faced the major challenge of
stiff competition from the strong local players such
as Reliance and Bharti Airtel.
Vodafone entered the Indian market with the
acquisition of a 10% stake in Bharti Ventures Ltd
in December 2005 (now Bharti Airtel Ltd). But
Bharti Airtel later ruled out any further dilution of its
stake when Vodafone wanted to pursue its
ambitions in the subcontinent more aggressively.
Thus, Vodafone had to look for a viable alternative
to make a strong foray into the Indian market,
which came in shape of Hutchison Essar Ltd.

3.2 Geographic Diversification

versus Concentration

According to the concept of geographic

diversification versus concentration, if product
or market factor under prefer diversification exist,
a company is likely to benefit by moving rapidly
into many countries simultaneously; otherwise the
company might move to just one or a few foreign
countries until a substantial presence is developed
there. 18

With respect to this principle and the data

available, Vodafone planned to expand into the
emerging markets like Egypt, Romania and India,
as the developed markets like Europe were getting
saturated. However, it was also selectively exiting
from mature markets such as Japan, Sweden,
and Belgium where it could not establish a
dominant position.

17
Adapa Srinivasa Rao, “The Hutchison Essar Acquisition:
Vodafone’s Foray into an Emerging Market,” 2008
18 19
“Indian Telecommunication Story: from 10 Million to 150
Daniels, Radebaugh, & Sullivan, International Business Million Mobile Subscribers in 5 Years,” www.tra.in,
Environments and Operations, 11th Ed., 2009 June19, 2007

8
4 Collaborative Strategies
Implemented
Companies collaborate with other companies in
either domestic or foreign operations: to spread
and reduce costs, to allow them to specialize in
their competencies, to avoid competition, to
secure vertical or horizontal links, and to gain
knowledge.20
Control and prior expansion of the company
are the two considerations made when choosing
collaborative arrangements.
In case of Vodafone’s acquisition of Hutchison
Essar, it was clear that Vodafone wanted to enter
the market with a player that had prior expansion
in the market but also wanted to uphold a due
control in the operations.
New entry in the Indian telecommunication
industry would have been difficult for Vodafone as
it would have to directly compete with well
established player in the telecommunication
industry like Bharti Airtel, Reliance, Tata telecom,
Idea, BSNL and others.
Vodafone went for an equity alliance while
acquiring Hutchison Essar Ltd. (HEL). Actually, it
was HTIL; the majority stake owner in the HEL
declared that its stake was up for sale in
November 2006. Buying HTIL’s stake in HEL
seemed an attractive proposition to Vodafone.
HEL was the company with the second highest
ARPU in the Indian telecom market. It had
licenses in almost all the lucrative telecom circles
including several metros in the country. Though
HEL didn’t operate in all the circles in the country,
its minority partner Essar had licenses, through its
subsidiary Essar Spacetel, to operate in another 7
not so profitable circles, giving it wide coverage.
Hutch was also considered one of the best-run
telecom companies in the country. The high brand
recall for Hutch, the brand of HEL, among
customers and the company’s use of the latest
technology increased HEL’s attractiveness to
20
Daniels, Radebaugh, & Sullivan, International Business
Environments and Operations, 11th Ed., 2009
Vodafone. Hence, the prior expansion of HEL
was a reason for Vodafone to acquire it for its
entry in India.
On December 22, 2006, Vodafone announced that
the company’s board believed in the growth
potential of the Indian telecom market and was
therefore considering acquiring a considerable
stake in HEL.
Another reason for Vodafone to acquire and get
into equity alliance with HEL was that some of the
big players in the Indian telecom industry,
Reliance, Bharti Airtel, Essar and Orascom, were
already eyeing on acquiring the stakes in HEL
that were put up on sale by HTIL.
Challenges
It was not easy for Vodafone to both acquire the
HEL and then maintain the collaborative strategies
with all the stakeholders.
Before initiating the bidding process, Vodafone
had to clear many regulatory issues. Bharti Airtel,
in which Vodafone had a 10% stake, asked its
partner to make it clear whether Vodafone wanted
to continue its relation with it. Moreover, as
Government of India’s telecom policy allowed only
74% of FDI into the sector, Vodafone’s acquisition
of a 67% stake in HEL would lead to the company
crossing the limits of FDI allowed as both the
players would be operating in the same circles.
Vodafone also had to get clearances from various
regulatory bodies like FIPB, Telecom Regulatory
Authority of India (TRAI) and some other national
security agencies.
Meanwhile, Essar made a bid of US$11 billion to
acquire the remaining 52% stake in HEL. Essar
argued that it should be given the first chance to
buy HTIL’s stake as it was already a partner in the
venture. Essar was expected to use its right of first
refusal to counter the bids by the potential
competitors. Essar proved to be a formidable
competitor for Vodafone in the bidding process.
There were always fears of the bidding process
ending in tedious courtroom proceedings, if Essar
took HTIL to court.21
21
Adapa Srinivasa Rao, “The Hutchison Essar Acquisition:
Vodafone’s Foray into an Emerging Market,” 2008
9
When the bids were opened on February 11,
2007, Vodafone emerged was the highest bidder
and the board of HTIL accepted its bid.
Vodafone’s final offer amounted to US$11.1 billion
in an all-cash deal for the stake. The bid valued
HEL at an enterprise value (EV) of US$18.8
billion. It became the single biggest foreign
investment in the India’s history. It was also
Vodafone’s third biggest deal ever.
The Acquisition
On March 22, 2007, Vodafone signed a
shareholder agreement with its Indian partner,
Essar, according to which Vodafone would hold a
52% and Essar would continue to hold a 33%
stake. Some other minority shareholders, such as
Asim Ghosh (Ghosh), Infrastructure development
finance company (IDFC) and Analjit Singh
together would continue to hold the remaining 15
per cent stake in the company.22
Finally Vodafone and Essar came to an
agreement to run HEL jointly. The agreement
included a put option to sell the Essar’s 33% stake
in the open market over a period of three to four
years. This meant that Vodafone would pay the
balance to Essar if it got any lower price in the
market than what Vodafone had offered HTIL
when it bought its stake. But, Vodafone refused to
directly buy the stake of Essar in HEL for a
premium. It was agreed that the name of the
acquired company would be changed to Vodafone
Essar.23
would hear that some big business house called
some minister attempting to crater the deal. The
billionaire losers’ club was trying to unwind the
deal,”24 he said. Realizing that these were part and
parcel of doing business in emerging markets
such as India, Sarin called for greater
transparency from Indian regulators in M&A
approvals.
Other than this, entering into a market as a new
player was also not easy for Vodafone so it went
ahead with an acquisition deal, but it had to
develop a culture and trust among rest of the
stakeholders, especially Essar for smooth
operation in the foreign land.
The differences with the Essar over the acquisition
were put to rest when Mr. Sarin, famously
declared, “My first preference is Essar, my second
preference is Essar and my third preference is
Essar. Today is Valentine’s Day. I am sending
roses to Essar; I am sending olive branches to
Essar,”25 said Sarin.

5 Conclusion
Getting into an emerging market such as India is
not that an easy choice, the companies need to
evaluate all kinds of risks from monetary to
competitive to political. Even if Arun Sarin, the
CEO of Vodafone, was given a warm welcome
because of his efforts in bringing the Vodafone
deal to India, it was not an easy cake to bid
against influential players and against red tape in
India.

In June 2006, Sarin alleged that the unsuccessful

bidders were trying to derail the deal. “One day I
22
“Vodafone Case Listed for Tuesday,”
www.tribuneindia.com, March 17, 2007
23
Adapa Srinivasa Rao, “The Hutchison Essar Acquisition:
Vodafone’s Foray into an Emerging Market,” 2008
24
“Vested Interests Tried to Derail Hutch Buy: Sarin,”
www.expressindia.com, July 9, 2007.
25
Elizabeth Judge, “Vodafone Anxious to Head off Legal
Delays to Essar Delay”, www.timesonline.co.uk, February
15, 2007.

10
6 References 1 3. “I n d ia n Te le co mmu n ica t ion S to ry:
f ro m 10 Millio n to 1 50 Millio n
Mo b ile Su bscrib e rs in 5 Y ea rs, ”
1 . K e rry Ca pe ll, “Wh y an In d ia Dea l www. t ra . in , Ju n e1 9, 2 00 7
is V it a l to V od af on e , ”
1 4. “V od a fo n e Ca se L ist ed fo r
www. b u sine sswe e k. co m, Jan ua ry
Tu e sd a y, ” www. t rib u ne in d ia . co m,
1 6, 20 07 .
Ma rch 17 , 20 07
2 . A da pa S rin iva sa Rao , “Th e
1 5. V e st ed In te re st s Trie d t o De ra il
Hu t ch iso n E ssa r A cq u isit ion :
Hu t ch Bu y: Sa rin , ”
V od af o ne ’s Fo ra y in t o an E me rg ing
www. e xp re ssind ia . co m, Ju ly 9,
Ma rke t , ” 20 08 .
2 00 7.
3 . “V od a fo n e ’s Fu ll- ye a r P ro f it Dip s, ”
1 6. E liza be t h Jud g e, “V od a fo ne
www. b b cne ws. co m, Ma y 2 9, 20 07 .
A n xio u s t o Hea d o ff L eg a l De la ys
4 . "V o da f on e ’s Hist o ry, " to E ssa r De la y”,
www. vo d af on e . co m. www. t ime so n lin e. co .u k ,
Fe b ru a ry1 5, 2 00 7.
5 . www. e ssa r. co m

6 . S t rat e g ic De cisio n s Con f e re n ce

2 00 7 A nd y Ha lfo rd ,
www. vo d af on e . co m

7 . Da n ie ls, Ra de ba u gh , & S u llivan ,

I nt e rna t io na l B usin e ss
E n viron me n t s a nd Op e rat io n s,
1 1t h Ed ., 2 00 9

8 . “I n d ia to b e Vo da fo n e 's la rge st
ma rke t , ”
www. t ime so f ind ia . ind ia t ime s. co m,
Ma rch 25 , 20 07

9. “Mob ile Ph on e s Ta ke o ve r in
I nd ia , ” www. b b cne ws. co m,
No ve mbe r 9 , 2 00 4

1 0. B ud ip ut ra , “In d ia ’s 3G Po licy mig h t

be An no un ced So on , ”
www. 3 g wee k. ne t , Ap ril 7 , 2 00 7

1 1. “3 G Po licy b y th e E nd of th is
Mo n th : DO T, ”
www. t rib u ne in d ia. co m, Ju ne 6,
2 00 7

1 2. Reu t e rs, Lo nd on .

11