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

........................... 2 2.........2 HUTCHISON ESSAR LTD......................1 ENVIRONMENTAL CLIMATE: OPPORTUNITIES AND RISKS ........................................... ............................................................................... 8 REFERENCES .............................Table of Contents 1 2 EXECUTIVE SUMMARY ................................................... 9 3 4 5 6 1 ...1 OBJECTIVE OF ANALYSIS .........................................................................2 BACKGROUND NOTE........................................................................................................................................1 VODAFONE..................................2 GEOGRAPHIC DIVERSIFICATION VERSUS CONCENTRATION .....................................2 W HY VODAFONE CHOSE INDIA²COUNTRY ANALYSIS.........................................2 2....................4 3........................ 2 1.... 3 3...................................................................................................................................................... 7 CONCLUSION .........................................................................6 COLLABORATIVE STRATEGIES IMPLEMENTED ...........................

May 29. Hutch in India and T-mobile in the US. Vodafone bought a 52% stake in HEL for US$11.2 Hu tch iso n Essar L td. www. Kerry Capell. It was the fourth largest service provider in terms of customer numbers.1 Vodafone Vodafone. The brand name µVodafone¶ comes from µVoice data fone¶. Africa.essar. It had mobile operations in countries like Hong Kong. HEL was a joint venture between HTIL. 2007. the minority shareholder. The company was valued at US$19. 2 1 3 ³Vodafone¶s Full-year Profit Dips. HEL was one of the leading mobile operators in India.1 billion from Hutchison Telecom International Ltd. 33% stake was still held by the Essar Group (Essar). And gaining control of a fast-growing operator in India is the best opportunity he has to do it.1 Executive Summary ³With limited growth prospects in Vodafone¶s core European markets. ³The Hutchison Essar Acquisition: Vodafone¶s Foray into an Emerging Market. HTIL operated mobile services in many countries under various brand names like µ3¶ in Europe. USA. and the US. It operated under the brand name µVodafone¶.com 2 . Israel.¶ www. Thailand.7 (Reliance). based in the UK.businessweek. investment.5 1. This announcement ended an acquisition battle probably the most ferociously fought ± in the Indian telecom sector. and the Essar. Europe. Shipping & Logistics and Construction. 4 5 Adapa Srinivasa Rao. (HTIL).com. 2006. Principal Analyst at Ovum.1 Objective of Ana lysis Through this paper. 1 job right now is to convince investors that he has a viable long term growth strategy.2 2. Macau. Indonesia and Vietnam. 2 Background Note 2. From then onwards there was no looking back for the telecom giant as it kept on expanding its market all over the world.bbcnews. was the world¶s largest mobile communications company by 3 revenue. January 16.´ 2008.com. As of December 31. Sri Lanka. Essar and the Hinduja group. 2007. Communications. Sarin¶s [Arun Sarin. was an infrastructure and services major.´ www. reflecting the company¶s wish to provide voice and data services on the mobile phones. 2007.´11 ± John Delaney.´ www.6 million customers spread across 25 countries in five continents. UK-based telecom company. µVodafone¶s History. the 4 Middle East. and collaborative strategies work in the arena of international business.vodafone . declared that it had finally bagged the fourth largest Indian mobile operator. Vodafone Ltd. the company had a subscriber base of 198. Essar. CEO.. Vodafone operated in Europe. 2000. Asia Pacific. 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.com. the Vodafone Group Plc (Vodafone). Energy. Hutchison Essar Ltd. Vodafone won the battle against other major competitors in the fray like Reliance Communications Ventures Ltd. On February 11. The company changed its name once again to Vodafone Group Plc on July 28. (HEL). Ghana. It had interests in various sectors like Steel.3 billion. ³Why an India Deal is Vital to Vodafone. in February 2007] No. 2 in January 2007. owned by the Ruia family.

He presented India as the 2nd most populated country which has low mobile penetration. the chief financial officer of Vodafone. It wanted to bow build on its strong track record of creating value in other emerging markets. Romania.3 Why Vodafone Chose India²Country Analysis In its Strategic Decisions Conference 2007. presented this India as one of the most promising emerging market for mobile phone industry.com 3 . Andy Halford. Vodacam and Turkey. such as India. www.vodafone. 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. 6 6 Strategic Decisions Conference 2007 Andy Halford. Vodafone already had a good market share in other developing countries such as Egypt.

India is the third largest market after Germany (30. 11th Ed.3. it could be justified that India presented one of the most mature regulatory practices of mobile telephony. whose combination should determine what action to take.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.´ Other than the obvious market size that Vodafone was catering to through its deal with Hutchison Essar Ltd. the world's second largest mobile operator in terms of subscribers and largest in terms of 9 o o Now. India. The sector was also characterized by strong competitiveness between players. provided both opportunities and risks for its foray into its mobile market. India is likely to soon surpass Germany and the US as Vodafone's biggest market in terms of subscribers. International Business Environments and Operations. the number of the mobile phone users had overtaken the number of landline users in October 2004 with mobile phone users reaching 44. November 9. & Sullivan. In India. 7 In terms of Vodafone. on March 25. Radebaugh. March 25.timesofindia. technology. The Times of India. the host country.6 million) and the US (26. 2009 8 10´Mobile Phones Takeover in India. GOI raised the FDI limit in the telecom sector from 49% to 74%. International Business Environments and Operations. Companies consider environmental climate in a host country that can significantly affect their successes or failures. According to a report published in India¶s leading daily. 2007. & Sullivan. The report suggested.bbcnews.9 million. and other advantages Allow an acceptable percentage of ownership Have resources they need 11 9 Opportunities Some of the opportunities that Indian market provided to Vodafone were: y Market Size: Expectation of large market and sales growth is probably a potential 8 location¶s major attraction.2 million subscribers) for Vodafone. & Sullivan.´ www.indiatimes. International Business Environments and Operations. The Indian telecom policy was considered one of the best telecom policies in the world.1 Envir on mental C limate: Opportun it ie s and Risks The environmental climate reveals both opportunities and risks. 11th Ed.. In 2006. India was reported to become Vodafone¶s largest market. although the company might fail short of its target of becoming number one mobile player in the country.com. 11th Ed. Currently. considering these factors in terms of Vodafone¶s selection for India. revenue. 2004 11 Daniels. 2007 7 Daniels. y Ease and Compatibility of Operations: Companies often pare down proposals to those countries that: o Offer size. 2009 4 ... the Indian mobile market also provided a significant obsolesce and leapfrogging of landlines. Government of India (GOI) brought in significant economic and technological reforms. Radebaugh. ³On the back of continuing surge in the number of mobile users. Radebaugh. This was the green signal for many international telecom companies ³India to be Vodafone's largest market.com. 2009 Daniels.´ www.

2006.´ www.tribuneindia. Vodafone had expanded in emerging markets in Eastern Europe and Africa. The strong rate of economic growth in India had led to a sharp increase in disposable incomes among the Indian middle classes. * Deal increases Vodafone's presence in higher growth emerging markets. April 7. June 6. * Vodafone says deal neutral to adjusted earnings per share in the first year and accretive to earnings thereafter. Including intangible amortisation. in June 6.8 billion. London: ³Vodafone's deal gives Hutchison Essar an enterprise value of $18. It had only a 3. But starting a new telecom venture in a highly competitive Indian telecom market seemed formidable and so Vodafone was keener to make an acquisition. The business had revenue growth of 51 percent and an EBITDA margin of 33 percent in the six months to June 30. 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. & Sullivan. Vodafone had been eyeing the Indian market for quite a long time. Vodafone only had a limited presence in Asia. The group will assume a net debt of around $2 billion as part of the acquisition. In the case of Vodafone¶s entry into Indian market through the acquisition of Hutchison Essar Ltd.3% stake in China Mobile and a 10% stake in Bharti Airtel. International Business Environments and Operations.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.net.6 percent stake in India's top mobile operator Bharti Airtel (BRTI. excluding intangible asset amortisation.BO) for $1. and an internal rate of return of around 14 percent. 2007 Daniels.´ www. 2007 14 ³3G Policy by the End of this Month: DOT. DoT declared that the 3G policy of GOI would be released very shortly. companies evaluate return on investment (ROI) as means of explaining risk considerations in International business. India¶s defense services indicated that they would release 42 Mega Hertz of spectrum by the end of July. with a return on invested capital exceeding the local risk adjusted cost of capital in the fifth year. * Vodafone says the deal meets its financial investment criteria.6 billion back to Bharti group. Vodafone¶s plans were to leverage on its experience in rolling out 3G services in developed markets. 2007. and announced an agreement with Bharti to share network infrastructure in India to cut costs. ³India¶s 3G Policy might be Announced Soon.who were keen to enter the Indian telecom market.12 And interestingly at the same time.´ 2008 13 Budiputra. 11th Ed.3gweek. deal expected to dilute adjusted earnings per share by around 7 percent in the first year before 15 Adapa Srinivasa Rao. here is the fact box of the deal as analyzed by Reuters. and was now looking to India. over 24 million customers and an over 16 percent market share. Radebaugh.. most investors prefer certainty to 15 uncertainty. 12 Risks Return on Investment While making international capital-investment decisions. * Vodafone has also struck a parallel deal to sell a 5.com. ³The Hutchison Essar Acquisition: Vodafone¶s Foray into an Emerging Market. In the same purview. 2009 5 . with proportion of the group¶s EBITDA from emerging market businesses set to increase to over 33 percent by 2012 from 20 percent now. * Hutch Essar deal to give Vodafone a pan-India presence.

others judged it a smart move as Vodafone gained a foothold in the fastest growing mobile markets in the world. Vodafone did face some criticism with regard to the pricing of the deal. 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. Vodafone entered the Indian market with the acquisition of a 10% stake in Bharti Ventures Ltd in December 2005 (now Bharti Airtel Ltd). and India had even overtaken China as the fastest growing mobile market in the world. and Belgium where it could not establish a dominant position. 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. Vodafone planned to expand into the emerging markets like Egypt. 3. Thus.´ 2008 ³Indian Telecommunication Story: from 10 Million to 150 Million Mobile Subscribers in 5 Years. But Bharti Airtel later ruled out any further dilution of its stake when Vodafone wanted to pursue its ambitions in the subcontinent more aggressively.19 India¶s mobile market was presenting an average growth of 90% year on-year. it was also selectively exiting from mature markets such as Japan. Radebaugh.tapering off and becoming neutral by the fifth year. Some critics commented that Vodafone had paid an excessive price for the acquisition. However. however.tra. International Business Environments and Operations. faced the major challenge of stiff competition from the strong local players such as Reliance and Bharti Airtel.´ www. 11th Ed. & Sullivan. 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 fast growing Indian telecom market. countries until a substantial presence is developed 18 there. 2007 6 . otherwise the company might move to just one or a few foreign 18 Daniels. if product or market factor under prefer diversification exist. a company is likely to benefit by moving rapidly into many countries simultaneously. 17 Adapa Srinivasa Rao. With respect to this principle and the data available. Hence. June19.2 Geographic Diversif ication versu s Concentrat ion According to the concept of geographic diversification versus concentration.in. 2009 19 16 Reuters. as the developed markets like Europe were getting saturated. ³The Hutchison Essar Acquisition: Vodafone¶s Foray into an Emerging Market.´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. Romania and India. In fact..17 Vodafone. Sweden. London. 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. But.

Actually. Bharti Airtel. it was HTIL. ³The Hutchison Essar Acquisition: Vodafone¶s Foray into an Emerging Market. Essar was expected to use its right of first refusal to counter the bids by the potential competitors. Hence. as Government of India¶s telecom policy allowed only 74% of FDI into the sector. Vodafone went for an equity alliance while acquiring Hutchison Essar Ltd. 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. 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. There were always fears of the bidding process ending in tedious courtroom proceedings. and to gain knowledge. On December 22. Vodafone emerged was the highest bidder 21 Adapa Srinivasa Rao. International Business Environments and Operations. Before initiating the bidding process. Meanwhile. in which Vodafone had a 10% stake. 20 Control and prior expansion of the company are the two considerations made when choosing collaborative arrangements. BSNL and others. 2007. asked its partner to make it clear whether Vodafone wanted to continue its relation with it. through its subsidiary Essar Spacetel. Radebaugh. to operate in another 7 not so profitable circles. giving it wide coverage. to secure vertical or horizontal links. Though HEL didn¶t operate in all the circles in the country.. Tata telecom. Bharti Airtel. Idea. Buying HTIL¶s stake in HEL seemed an attractive proposition to Vodafone. if Essar took HTIL to court. Reliance.21 When the bids were opened on February 11. among customers and the company¶s use of the latest technology increased HEL¶s attractiveness to Daniels. were already eyeing on acquiring the stakes in HEL that were put up on sale by HTIL. Vodafone had to clear many regulatory issues. the brand of HEL. Moreover. to allow them to specialize in their competencies. Vodafone also had to get clearances from various regulatory bodies like FIPB. Hutch was also considered one of the best-run telecom companies in the country. to avoid competition. Challenges It was not easy for Vodafone to both acquire the HEL and then maintain the collaborative strategies with all the stakeholders. the prior expansion of HEL was a reason for Vodafone to acquire it for its entry in India. 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. 2009 20 Vodafone.4 Collaborative Strategies Implemented Companies collaborate with other companies in either domestic or foreign operations: to spread and reduce costs. & Sullivan. Essar and Orascom. 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. 11th Ed. Reliance. Telecom Regulatory Authority of India (TRAI) and some other national security agencies.´ 2008 7 . its minority partner Essar had licenses. Essar proved to be a formidable competitor for Vodafone in the bidding process. 2006. the majority stake owner in the HEL declared that its stake was up for sale in November 2006. 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. (HEL). The high brand recall for Hutch. It had licenses in almost all the lucrative telecom circles including several metros in the country. Essar made a bid of US$11 billion to acquire the remaining 52% stake in HEL. HEL was the company with the second highest ARPU in the Indian telecom market. In case of Vodafone¶s acquisition of Hutchison Essar. Essar argued that it should be given the first chance to buy HTIL¶s stake as it was already a partner in the venture.

Infrastructure development finance company (IDFC) and Analjit Singh together would continue to hold the remaining 15 per cent stake in the company.´25 said Sarin. Other than this. 2007. The 24 22 ³Vodafone Case Listed for Tuesday. It was agreed that the name of the acquired company would be changed to Vodafone Essar. In June 2006. such as Asim Ghosh (Ghosh). The Acquisition On March 22. Vodafone¶s final offer amounted to US$11. especially Essar for smooth operation in the foreign land.´ www. Even if Arun Sarin. famously declared. entering into a market as a new player was also not easy for Vodafone so it went ahead with an acquisition deal. Sarin alleged that the unsuccessful bidders were trying to derail the deal. July 9. Realizing that these were part and parcel of doing business in emerging markets such as India. the companies need to evaluate all kinds of risks from monetary to competitive to political.com. ³Vodafone Anxious to Head off Legal Delays to Essar Delay´. February 15.expressindia.22 Finally Vodafone and Essar came to an agreement to run HEL jointly.and the board of HTIL accepted its bid. 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. 25 Adapa Srinivasa Rao. The bid valued HEL at an enterprise value (EV) of US$18. 2007. was given a warm welcome because of his efforts in bringing the Vodafone deal to India.23 5 Conclusion Getting into an emerging market such as India is not that an easy choice. Essar. Vodafone signed a shareholder agreement with its Indian partner. Sarin called for greater transparency from Indian regulators in M&A approvals.co. my second preference is Essar and my third preference is Essar. The Hutchison Essar Acquisition: Vodafone¶s Foray into an Emerging Market. 2007. www. I am sending roses to Essar. I am sending olive branches to Essar. Vodafone refused to directly buy the stake of Essar in HEL for a premium. it was not an easy cake to bid against influential players and against red tape in India. ³My first preference is Essar.1 billion in an all-cash deal for the stake. the CEO of Vodafone. Today is Valentine¶s Day. 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.´ he said.8 billion.´ 2008 ³ Elizabeth Judge. Some other minority shareholders.uk. but it had to develop a culture and trust among rest of the stakeholders.tribuneindia.´ www.timesonline. according to which Vodafone would hold a 52% and Essar would continue to hold a 33% stake. 8 . The differences with the Essar over the acquisition were put to rest when Mr. billionaire losers¶ club was trying to unwind the 24 deal. It was also Vodafone¶s third biggest deal ever. 2007 23 ³Vested Interests Tried to Derail Hutch Buy: Sarin. It became the single biggest foreign investment in the India¶s history. But.com. Sarin. March 17. ³One day I would hear that some big business house called some minister attempting to crater the deal.

200 7 9. March 25. 4. I nt ernat i onal Busi ne s s Env i ronm ent s and O per at i on s. t i m esof i ndi a. 2007. " 13. ´ www. ³Vodaf one Ca se Li st ed f or T uesday. uk. com Conf erenc e Hal f ord. 9 . Reut er s. c om . 200 7 15. ³W hy an I ndi a Deal is Vi t al to Vodaf one. 5. www. bu si ne ssweek. 2007. 2007 14. Budi put ra. t r a. & Sul l iv an. June 6. ´ www. com . "Vodaf one¶ s www. net . ´ www. ³I ndi a t o b e Vo daf one' s l arg e st m arket . com . ´ 2008. 11t h Ed. ³I ndi a ¶ s 3G Pol i cy m i ght be An nou nced Soo n. June1 9. t ri bu nei ndi a. March 17. co. ³3G Pol i cy by t he End of t hi s Mont h: DO T . 2004 10. com 6. . Adapa Sri niv asa Ra o. 2009 8. com . Hi st ory. i ndi at im es. com. v odaf one. e ssar. Vest e d I nt ere st s T ri ed t o Derai l Hut ch Buy: Sari n. ´ www. com . ´ www. www. 200 7. Apri l 7. May 29. 7. 2007 11. Kerry Ca pel l . Nov em ber 9. Januar y 16. 2007. ³T he Hut chi so n E ssar Ac qui si t i on: Vodaf one¶ s F oray i nt o an Em ergi ng Market . com . t ri bu nei ndi a. ³Vod af one Anx i ous t o H ead of f Legal Del ay s to Essar Del ay´. com . ³Vodaf one¶ s F ul l -year Prof i t Di ps. ´ www. v odaf one. ´ www. 3. Dani el s. Lon don. El i zabet h Judg e. ´ www. 3g week.6 References 1. bbcn e ws. ³I ndi an T el ecom m uni cati on St ory: f rom 10 Mi lli on t o 150 Mi ll i on Mobi l e Subscri ber s i n 5 Year s. 2007 12. ³Mobi l e Phone s T akeov er in I ndi a. 16. ´ www. b bcne ws. Ra deb aug h. St rat egi c Deci si on s 2007 An dy www. Jul y 9. i n. 2. t i m eso nl i ne. F ebruary1 5. ex pre ssi ndi a.

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