Bolot Balbakov Clemens Hohner Philipp Weber

Summer Term 08

The Hutchison Essar Acquisition by Vodafone
Presentation within the course International Strategic Management at the Chair of International Management
Ingolstadt, May 26th 2008
Prof. Dr. Michael Kutschker Chair of International Management

Agenda 1. 2. 3. Vodafone Hutchison Indian mobile phone industry Main developments Importance for the economy Major players Trends 4. Options & strategy of Vodafone in India 5. Role of the Indian government 6. Major opportunities & threats of the investment in India 7. Challenges ahead after the deal 8. Development until today 9. Discussion
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 2 Prof. Dr. Michael Kutschker Chair of International Management

1.

Vodafone
• • • • 1950: 1991: 1996: 1999: Racal Electronics Plc. Vodafone Group various acquisitions in the UK expanded overseas (Air Touch Communications, Inc. USA) 35% share of Mannesmann AG • 2000: merged with US Bell Atlantic Corp. bid purchase for Mannesmann AG worldwide expansion except some mature markets • • 2005: 2007: entered Indian market (acquisition of 10% in Bharti Ventures Ltd.) 11.02.: merger with Hutchison Essar Ltd.
Prof. Dr. Michael Kutschker Chair of International Management

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 3

1.

Vodafone

Source: Vodafone
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 4

Prof. Dr. Michael Kutschker Chair of International Management

2.

Hutchison Essar Ltd. (HEL)

Joint Venture between HTIL and Essar • 1994: cellular license for Mumbai circle JV between HTIL & Max India Ltd. = ‚Hutch‘ • • 1998: 2005: HTIL increased stake consolidation business operations by HEL under ‚Hutchison Max Telecom Ltd.‘ Essar Spacetel applied for licenses in 7 circles HEL bought out Essar Spacetel ‚Hutchison Essar Ltd.‘

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 5

Prof. Dr. Michael Kutschker Chair of International Management

2.

Hutchison Essar Ltd. (end 2006)

• • • •

revenue (end 2005): customers: market share: technology:

US$164.4 million 23 million 19% GSM

Source: Vodafone

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 6

Prof. Dr. Michael Kutschker Chair of International Management

3.

Indian mobile phone industry
Main developments:

• • • • • • •

1994: 1995: 1999: 2000: 2001: 2004: 2007:

new telecom policy for 4 metropolitan cities mobile licenses for 19 more circles National Telecom Policy GSM technology consolidation: creation of IDEA Cellular Ltd. private participation in NLD & ILD services universal service telecom license # mobile phone users (44.9 million) > # landline users introduction 3 G policy

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 7

Prof. Dr. Michael Kutschker Chair of International Management

3.

Indian mobile phone industry
Importance for the Indian economy:

Com position GDP 2006
public serv ices, 14.0% banking, insurance, real estate, 13.9% industry, 15.5% agriculture, 18.5%

mining, 2.2%

trade, hotels, transport, communication, 27.0% energy, gas, water, 2.0%

construction industry, 6.9%

Source: BFAI

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 8

Prof. Dr. Michael Kutschker Chair of International Management

3.

Indian mobile phone industry
Importance for the Indian economy:

econom growth 2006 ic
14.6%

10.8%

10.6% 7.9%

7.5% 5.2%

0.8%

agriculture

mining

energy, gas, water

construction industry

banking, insurance, real estate

trade, hotels, transport, communication

social sector

Source: BFAI

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 9

Prof. Dr. Michael Kutschker Chair of International Management

3.

Indian mobile phone industry
Major players:

List of Cellular Service Providers in India
23 23 21 20 16 # circle

8

7 3 2 2

1

1

1

ID Es EA co rt Te le co Air c m m el un ica tio n Sp ice M C TN om L m un ica tio ns

BS N L Te le se rv ice s

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 10

Ta ta

Prof. Dr. Michael Kutschker Chair of International Management

HF Sh C L ya m Te le lin k

Ai rte l

Re lia nc e

Hu tc h

Bh ar ti

BP L

3.

Indian mobile phone industry
Major players:

Market Share of Mobile Operators by Subscribers in India

IDEA Cellular, 10% Bharti Airtel, 25% Hutchison Essar, 19%

Reliance Communications, 20%

BSNL & MTNL, 22%

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 11

Prof. Dr. Michael Kutschker Chair of International Management

3.

Indian mobile phone industry
Trends:

Source: Vodafone

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 12

Prof. Dr. Michael Kutschker Chair of International Management

4.

Options & strategy of Vodafone in India Minority Stake Own venture

Options of Vodafone
Joint Venture Acquisition/Merger

General Comparison: Acquisition vs. New venture
Dimension of utility 1. 2. 3. 4. 5. 6. 7. 8. Economies of scale Economies of scope/local resources Saving of time Aspects of competition Strategic view Structural view Cultural view Capital costs and risks New venture – – – – + + + + Acquisition + + + + – – – –

Source: following Kutschker (1992), p. 513

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Prof. Dr. Michael Kutschker Chair of International Management

4.

Options & strategy of Vodafone in India

The Indian Mobile market
One of the biggest in the world Fast growth High competition Requirement to enter in the market: licenses

• • • •

Importance of economies of scale Necessity of investments in the whole country Necessity of investments in a very short time Importance of strong market position

=> In 2006/2007 an acquisition seems to be the better strategy to enter the Indian Mobile Market
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 14 Prof. Dr. Michael Kutschker Chair of International Management

4.

Options & strategy of Vodafone in India

The Indian Telecom market
Wholly owned subsidiary or joint venture? In general: wholly owned company better choice
• • • • No complications with the partner Complete own strategic control Better integration in the worldwide cooperation Complete implementation of an own brand strategy

However: Indian law allows just a majority stake
⇒ ⇒ FDI limit in the telecom sector = 74% no complete acquisition possible

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Prof. Dr. Michael Kutschker Chair of International Management

4.

Options & strategy of Vodafone in India

Vodafone and HTIL
November 2006: HTIL, major stake owner in the HEL, declared its stake was up for sale in November 2006
Selling reasons HTIL: • • • • Falling ARPU Concentration on other markets Negative experience with Indian government Difficult relations to the partner Essar Buying reasons Vodafone: • HEL = one of the most profitable telecom companies in India • Second highest ARPU • Licenses in almost all lucrative telecom circles • High brand recall for Hutch • Company’s use of the latest technology

The deal: • • • • • February 2007: Vodafone the highest bidder Price: US$11.1 /10.9 billion – in cash India: single biggest foreign investment in its history Vodafone: third biggest deal ever HTIL: nearly 700% returns on its investments in India
Prof. Dr. Michael Kutschker Chair of International Management

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5.

Role of the Indian Government

Reserve Bank of India (RBI) Foreign Investment Promotion Board (FIPB) Telecom Regulatory Authorithy of India (TRAI) Government of India (GoI)

Main difficulties: • Price regulations • Maximum amount of foreign investments (74%)

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Prof. Dr. Michael Kutschker Chair of International Management

6.

Major opportunities & threats of the investment in India

Opportunities • Size of the market • Biggest democracy of the world • Economic growth and growth of demand • well educated specialists • possibility to profit from economic core centers

Threats • Governmental regulations • Slowly bureaucracy • Lack of infrastructure • High level of competition ⇒ Lower profitability • Aspects of culture ⇒ Management of cooperation • Danger of joint ventures ⇒ Technology transfer

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Prof. Dr. Michael Kutschker Chair of International Management

6.

Major opportunities & threats of the investment in India

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Prof. Dr. Michael Kutschker Chair of International Management

7.

Challenges ahead after the deal
Expanding distribution and network coverage Expanding distribution and network coverage

Rebranding Rebranding

Lowering the total cost of network ownership

Driving a customer focused approach

Growing market share

Driving value growth in India

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Prof. Dr. Michael Kutschker Chair of International Management

7.

Challenges ahead after the deal
Expanding distribution and network coverage
Hutch Essar management
• No subsidy, low cost to connect

Vodafone value add • Invest in existing model • Accelerate distribution roll-out in line with network roll-out plans • Retail experience (7,000 stores)

Distribution

• 1,800 Hutch branded shops • Building distribution channels in new coverage areas

• Increase investment to build

Network

• Network performance in 16 circles

market share • Infrastructure sharing MOU with Bharti to enable industry leading cost structure

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 21

Prof. Dr. Michael Kutschker Chair of International Management

7.

Challenges ahead after the deal
Rebranding

Hutchison Essar Ltd.

Vodafone Essar

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 22

Prof. Dr. Michael Kutschker Chair of International Management

7.

Challenges ahead after the deal

The new reality of the mobile industry • Intensive competition by existing and new players • Significant price erosion

Vodafone’ s
problems Bharti Airtel, Reliance, others Low-cost strategies Cheap cell phones solutions MOU with contenders Accelerate rollout and reduce network cost Low-cost handsets Expansion Termination rates, roaming Global partnerships

• Customers have bigger choice in communications • Emerging markets delivering significant growth • Continued significant regulatory pressure

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 23

Prof. Dr. Michael Kutschker Chair of International Management

8.

Development until up today
Vodafone's market share has grown from 16.1% to 17.4% in 2007 Bharti leads with 23.9%, up from 21.4%

25 20 15 10 5 0 Bharti Airtel Vodafone Essar
Sources: Investors Business Journal
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 24 Prof. Dr. Michael Kutschker Chair of International Management

2007 2008

8.

Questions

Any questions?
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 25 Prof. Dr. Michael Kutschker Chair of International Management

9.

Discussion

Discuss options of market-entry of Vodafone in India

Capital- and Managementinput in home market

Export Licensing Franchising Joint Venture Acquisition or New venture
Capital- and Managementinput in foreign market

ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 26

Prof. Dr. Michael Kutschker Chair of International Management

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