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By: Tejas Keswani Hiren Merai Bipin Parmar Nasir Patel
71 million in September 2010. Indian Global System of Mobile Communication (GSM) telecom operators added 17. With this the overall tele-density (telephones per 100 people) has touched 62. network rollout in semi-rural areas and increased focus on the value added services (VAS) market.45 million new subscribers in November 2010.3 per cent in the same period from 452 million in 2009.76 per cent. This growth is poised to continue through the forecast period. successful auction of thirdgeneration (3G) and broadband wireless access (BWA) spectrum. the total mobile services revenue in India is projected to grow at a compound annual growth rate (CAGR) of 12. an increase of 2.72 million at the end of October 2010. Mobile market penetration is projected to increase from 38. taking the all-India GSM cellular subscriber base to 526. The industry has witnessed consistent growth during the last year on the back of rollout of newer circles by operators. According to a report published by Gartner Inc in June 2009.69 million at the end of October 2010 from 687. 2010. growing at a CAGR of 14. The India mobile subscriber base is set to exceed 771 million connections by 2013. registering a growth of 2. and India is expected to remain the world's second largest wireless market after China in terms of mobile connections.61 per cent from 723.7 per cent in 2009 to 63. The wireless subscriber base has increased to 706.12 million as on October 31.28 million in September 2010.5 per cent in 2013.18 million. MERGERS & ACQUISITIONS (M&A) IN INDIAN TELECOM INDUSTRY: . the number of telephone subscriber base in the country reached 742. The GSM subscriber base stood at 508.5 per cent from 2009-2013 to exceed US$ 30 billion. Meanwhile. According to the Telecom Regulatory Authority of India (TRAI). according to the Cellular Operators Association of India (COAI).51.Rekha Singh Telecom industry in India: The Indian telecommunications industry is one of the fastest growing in the world.
etc. The National Telecom Policy. 1961.842-585/2005-VAS/9 dated 1st February. M&A in telecom Industry are subject to various statutory guidelines and Industry specific provisions e. usually referred to simply as Vodafone. . SEBI Takeover regulation. It is the second largest mobile phone operator in terms of revenue behind Bharti Airtel. pipping Reliance Communications. In addition to M&A guidelines. It offers both prepaid and post-paid GSM cellular phone coverage throughout India with good presence in the metros. and Essar Group. 1956.India has become a hotbed of telecom mergers and acquisitions in the last decade.1 billion. The whole company was valued at USD 18. 2007. It was formerly known as Hutchison Essar. offering voice and data services in 23 of the country's 23 licence areas. 2007. 1994 (NTP 94) provided guidelines on foreign equity participation and as revised by NTP 99 permitted maximum 49% cap on foreign investment. Sweeping reforms introduced by successive Governments over the last decade have dramatically changed the face of the telecommunication industry.75G services based on 900 MHz and 1800 MHz digital GSM technology. is a cellular operator in India that covers 23 telecom circles in India. its products are simply branded Vodafone.8 billion. Vodafone Essar provides 2. 2002. 2006 DoT has enhanced the FDI limit in telecom sector to 74%. MRTP Act.77 million customers. Vodafone Essar is the Indian subsidiary of Vodafone Group 67% and Essar Group 33%. Competition Act. FEMA regulations. and third largest in terms of customers. On February 11. Despite the official name being Vodafone Essar. Foreign investors and telecom majors look at India as one of the fastest growing telecom markets in the world. Indian Telegraph Act. Income Tax Act. DoT has also issued guidelines on foreign equity participations and management control of telecom companies. It is among the top three GSM mobile operators of India. An overview of Vodafone-Essar: Vodafone Essar. which is the owner of the remaining 33%.. The company now has operations across the country with over 113. FEMA Act. Hinduja Group. Companies Act. Recently by its order no. The transaction closed on May 8. It is based in Mumbai. Vodafone agreed to acquire the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for US$11.g.
After getting the necessary government approvals with regards to the acquisition of a majority by the Vodafone Group. reflecting the name of its previous owner. 250 crores on this high-profile transition being unveiled today. 2007 Hutch became Vodafone in one of the biggest brand transition exercises in recent times. Previous Brands: Initially. consolidating its services under a single identity. Vodafone Essar is spending somewhere in the region of Rs. However. Hutchison. Along with the transition.Vodafone Essar will launch third-generation (3G) services in the country in the January-March quarter of 2011 and plans to spend up to $500 million within two years on its 3G networks. A popular daily quoted a Vodafone Essar director as saying that "the objective is to leverage Vodafone Group's global scale in bringing millions of low-cost handsets from across-the-world into India. around 1995. Earlier this year. Vodafone penned a global low-cost handset procurement deal with ZTE. Hutchison Essar relaunched the "Hutch" brand nationwide. The company used to be named Hutchison Essar. Growth of Hutchison Essar (1992-2009): In 1992 Hutchison Whampoa and its Indian business partner established a company that in 1994 was awarded a licence to provide mobile telecommunications services in Mumbai (formerly Bombay) and launched . the company services were branded Max Touch¸ renamed to Orange in 2000. which is looking to set-up a manufacturing unit in the country. The marketing brand was officially changed to Vodafone on 20 September 2007." Incidentally. In December 2006. On September 20. The company also plans to launch co-branded handsets sourced from global vendors as well. China's ZTE. cheap cell phones have been launched in the Indian market under the Vodafone brand. the company was rebranded as Vodafone Essar. the brand was marketed as Hutch. is expected to provide several Vodafone handsets in India.
Initially. Analjit Singh of Max still holds 12% in company.e 500 million subscribers) by 2012 while Hutch-Essar was having subscriber base of 24 million. In February 2007. In 2006. • Mobile penetration in India at the time of the deal was 13% that was projected to exceed 50% (i. . Then it also targeted business users and highend post-paid customers which helped Hutchison Essar to consistently generate higher Average Revenue per User ("ARPU") than its competitors.1 billion. well known brand and large distribution network -all vital to long-term success in India. But later Hutch took the majority Stake. In Delhi. Delhi and Kolkata. Rajasthan and Haryana. ESSAR was the major partner. Hutchison Telecom announced that it had entered into a binding agreement with a subsidiary of Vodafone Group Plc to sell its 67% direct and indirect equity and loan interests in Hutchison Essar Limited for a total cash consideration (before costs. UP (E). In these densely populated urban areas it was able to establish a robust network. expenses and interests) of approximately US$11. By adopting this focused growth plan. the company grew its business in the largest wireless markets in India — in cities like Mumbai. a strategic and well managed business plan is critical to success. it was able to establish leading positions in India's largest markets providing the resources to expand its footprint nationwide. By the time of Hutchison Telecom's Initial Public Offering in 2004.commercial service as Hutchison Max in November 1995. The Rationale Behind The Deal: The major rationales which led “Vodafone” to buy major stake in “Hutch” are: • The Government of India has opened the doors for foreign investor companies by permitting them to hold upto 74% stake in any telecom venture in India. In a country growing as fast as India. Hutchison Whampoa had acquired interests in six mobile telecommunications operators providing service in 13 of India's 23 licence areas and following the completion of the acquisition of BPL that number increased to 16. it announced the acquisition of a company (Essar Spacetel — A subsidiary of Essar Group) that held licence applications for the seven remaining licence areas.
bringing the deal close to completion after nearly three months since HTIL announced its decision to exit Hutch-Essar. It had a total customer base of 200 million (excluding Hutch-Essar) approximately. The group earned EBITDA of over $23 the previous year and had a market capitalization of close to $160 billion. who held a combined 67% stake in Hutch-Essar for a cash amount of $11.either directly as an operator or as an investor in other telecom companies. Hutchison Essar’s had a subscriber base of 24 million and considering that the monthly mobile subscriber addition in India was projected to be over 6 million. Facts about Vodafone (figures represent data at the time of the deal): “Vodafone” the name itself is very familiar as it is a multinational giant. The telecom major agreed to acquire the stake held by Hong-Kong based “Hutchison Telecom International” (HTIL) and its associates in HutchEssar. it provided immense growth . It would also assume Hutch-Essar’s net debt of $ 2 billion taking the enterprise value to $ 18. The company is operated in 27 countries. It so happened that Vodafone had to pay a steep control premium as it expected the acquisition to be earnings accretive after five years. Reliance Communications (the largest Indian CDMA mobile operator) along with London based NRI business group The Hindujas. Vodafone bought-out HTIL and its associates. in partnership with Qatar Telecom and Essar group.000 people worldwide. Thus.8 billion. Vodafone was the largest telecom operator globally in terms of revenues in the year 2006 with revenues of around $58 billion.1 billion thus giving the company controlling powers. the acquisition was a strategic move for Vodafone as it gave the company a strong presence in the fast growing market of India. But they could not bid as high as Vodafone did. which was more than China’s in September 2006. Although there were other bidders also namely R-ADAG Flagship. About the Deal: Vodafone emerged as the highest bidder for Hutchison –Essar in the bidding process.• The monthly mobile subscriber addition in India was over 6 million. The deal was finalized by HTIL Board and an agreement had been signed. Over and above this the company employed nearly 60.
opportunities for the company since the addition in subscriber rate was also greater than in China. Above shown is a comparison table comprising the four major players at the time of the conceptualization of the deal. 31. 2006 the EV/Subscriber works out to Rs. On an enterprise value (Market Capitalization plus debt) per subscriber basis.3 million as of December 31. This growth rate was likely to stay that way for the next few years. 36. based on Hutch-Essar’s implied Enterprise value of Rs.300 vis-à-vis Rs. 85000 Crores. It explains how much one subscriber contributes in the company’s enterprise value. the Hutch-Essar deal is at a 15-20% premium to its peers (Bharti & Reliance). applied on a mobile subscriber base of 23. Bharti & Reliance Communications reveals the following: • Enterprise Value (EV)/Subscriber: It is a popular metric for valuation in high growth markets as it reflects the potential for cash flows.800 for Bharti’s mobile segment. For instance. • EV/EBITD: . Taking three commonly employed yardsticks to compare the VodafoneHutch Essar deal with its key mobile peers.
the Hutch-Essar deal works out to a 20. Why Vodafone Agreed to Pay Premium? Vodafone’s willingness to pay the control premium stems from some key advantages that it perceives from the deal such as this acquisition meets the Vodafone ROIC (return on invested capital) that is expected to exceed local adjusted cost of capital within 3 to 5 years and the IRR is expected to be 14%. The Essar Group of Ruias would continue to hold 33. Voting Rights Acquired: British Telecom giant Vodafone would have a voting right for only 51. tax & amortization) standpoint too.91% since as per the then FDI regulations for telecom companies.09% through a Mauritius based Investment Company.91% equity stake although it was paying for 67% stake. depreciation.93% through a domestic subsidiary company. at 21 times. The holding in Mauritius based company was also the reason for Vodafone not to increase its stake to more than 51. The voting right on this stake is with Analjit Singh. the deal works out to a premium of 2535% to Bharti and Reliance. Key elements of the deal those were likely to play its strengths • Infrastructure Sharing with Bharti . Compared to the EV/EBITDA of Bharti’s mobile business. From an EV/EBITDA (earnings before interest.30% premium over its peers. Vodafone would only have an ‘economic interest’ in the remaining 15.02% as the Essar Group held 22. Hutch-Essar’s works out to 28 times. hence Vodafone would have to find local investors for the remaining 26%. • EV/Revenue: Based on this ratio too.07% equity stake. they could have had only 74% foreign ownership. Asim Ghosh and IDFC. which was counted as foreign holding in the company and another 10.This metric reflects the operational cash flows that can be reinvested for growth.
Troubling facets of the deal: Vodafone has been asked by the Supreme Court of India to deposit funds and furnish a guarantee from a nationalised bank after it lost a legal battle over a tax claim with the income-tax department.Concurrent with the Hutchison Essar deal. especially in the area of ultra-low-cost handsets. The apex court directed the telecom to provide a guarantee to the government and .200 crores as capital gains tax after Vodafone bought the Indian operations of Hutch for $11 billion three years back. the OPEX savings were likely to improve the EBITDA margin by 1. The Bombay High Court had ruled in favour of the I-T department. • Future Expansions Vodafone could plug Hutch Essar into its global procurement chain.5 %. Vodafone expected savings in capital expenditure (CAPEX) and operating expenditure (OPEX) for Hutch Essar to the tune of $ 1 billion over the next five years. Vodafone had entered into an MOU for infrastructure sharing with Bharti Airtel which had included sharing towers. The department had made a claim of Rs 11. Vodafone’s 3G experiences in Europe were expected to help Hutch-Essar get a competitive advantage in the 3G market place. shelter. civil works and back-haul transmission. following which Vodafone moved the Supreme Court.
Vodafone is in the final stage of negotiations with SBI for the guarantee. Earlier. SBI is not in favour of a counter guarantee from foreign banks as security. which consequently became a majority owner of the Indian telecom firm. The court has given the telecom company two months to arrange for the guarantee. CGP’s shares were sold to Vodafone.500 crores in cash with the court. SC had directed Vodafone to provide a bank guarantee from a nationalised bank and set aside Rs 2. .500 crores to the bank. Vodafone has to offer liquid collateral worth 110% of the total guarantee amount of Rs 8. Vodafone’s contention all along has been that the existing Indian law does not give Indian tax authorities jurisdiction over an overseas transfer of the kind it did.deposit cash before hearing the case. Vodafone was considering an option of providing a counter guarantee from foreign banks as security. Hutchison controlled its Indian telecom subsidiary through a Cayman Islands firm called CGP. The tax authorities have so far disputed the contention and say Vodafone should have deducted tax at source before paying Hutchison.