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Telecom industry in India :

The Indian telecommunications industry is one of the fastest growing

in the world. The industry has witnessed consistent growth during
the last year on the back of rollout of newer circles by operators,
successful auction of third -generation (3G) and broadband wireless
access (BWA) spectrum, network rollout in semi -rural areas and
increased focus on the value added services (VAS) market.

According to the Telecom Regulatory Authority of India (TRAI), the

number of telephone subscriber base in the country reached 742.12
million as on October 31, 2010, an increase of 2.61 per cent from
723.28 million in September 2010. With this the overall tele -density
(telephones per 100 peop le) has touched 62.51. The wireless
subscriber base has increased to 706.69 million at the end of
October 2010 from 687.71 million in September 2010, registering a
growth of 2.76 per cent.

Meanwhile, Indian Global System of Mobile Communication (GSM)

telecom operators added 17.45 million new subscribers in November
2010, taking the all -India GSM cellular subscriber base to 526.18
million, according to the Cellular Operators Association of India
(COAI). The GSM subscriber base stood at 508.72 million at the end
of October 2010.

According to a report published by Gartner Inc in June 2009, the

total mobile services revenue in India is projected to grow at a
compound annual growth rate (CAGR) of 12.5 per cent from 2009 -2013
to exceed US$ 30 billion. The Ind ia mobile subscriber base is set to
exceed 771 million connections by 2013, growing at a CAGR of 14.3
per cent in the same period from 452 million in 2009. This growth is
poised to continue through the forecast period, and India is
expected to remain the w orld's second largest wireless market after
China in terms of mobile connections.

Mobile market penetration is projected to increase from 38.7 per

cent in 2009 to 63.5 per cen t in 2013.

India has become a hotbed of telecom mergers and acquisitions in the

last decade. Foreign investors and telecom majors look at India as
one of the fastest growing telecom markets in the world. Sweeping
reforms introduced by successive Governments over the last d ecade
have dramatically changed the face of the telecommunication

M&A in telecom Industry are subject to various statutory guidelines

and Industry specific provisions e.g. Companies Act, 1956; Income
Tax Act, 1961; Competition Act, 2002; MRTP Act; Indian Telegraph
Act; FEMA Act; FEMA regulations; SEBI Takeover regulation; etc.

In addition to M&A guidelines, DoT has also issued guidelines on

foreign equity participations and management control of telecom
companies. The National Telecom Policy, 1994 (NTP 94) provided
guidelines on foreign equity participation and as revised by NTP 99
permitted maximum 49% cap on foreign investment. Recently by its
order no.- 842-585/2005-VAS/9 dated 1 st February, 2006 DoT has
enhanced the FDI limit in telecom sec tor to 74%.
An overview of Vodafone -Essar:

Vodafone Essar, usually referred to simply as Vodafone, is

a cellular operator in India that covers 23 telecom circles in
India. It was formerly known as Hutchison Essar . It is based
in Mumbai. Vodafone Essar is the Indian subsidiary of Vodafone
Group 67% and Essar Group 33%. It is the second largest mobile
phone operator in terms of revenue behind Bharti Airtel, and third
largest in terms of customers. The company now has operations across
the country with over 113.77 million customers.

On February 11, 2007, Vodafone agreed to acquire the controlling

interest of 67% held by Li Ka Shing Holdings in Hutch -Essar for
US$11.1 billion, pipping Reliance Communications, Hinduja Group, and
Essar Group, which is the owner of the remaining 33%. The whole
company was valued at USD 18.8 billion. The transaction closed on
May 8, 2007. Despite the official name being Vodafone Essar, its
products are simply branded Vodafone. It offers both prepaid and
post-paid GSM cellular phone coverage throughout India with good
presence in the metros.

Vodafone Essar provides 2.75G services based on 900 MHz and 1800 MHz
digital GSM technology, offering voice and data services in 23 of
the country's 23 licence areas. It is among the top three GSM mobile
operators of India.

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.

Previous Brands:

Initially, around 1995, the company services were branded Max Touch¸
renamed to Orange in 2000. In December 2006, Hutchison Essar re -
launched the "Hutch" brand nationwide, consolidating its services
under a single identity.

The company used to be named Hu tchison Essar, reflecting the name of

its previous owner, Hutchison. However, the brand was marketed
as Hutch. After getting the necessary government approvals with
regards to the acquisition of a majority by the Vodafone Group, the
company was rebranded a s Vodafone Essar. The marketing brand was
officially changed to Vodafone on 20 September 2007. On September
20, 2007 Hutch became Vodafone in one of the biggest brand
transition exercises in recent times. Vodafone Essar is spending
somewhere in the region of Rs. 250 crores on this high -profile
transition being unveiled today. Along with the transition, cheap
cell phones have been launched in the Indian market under the
Vodafone brand. The company also plans to launch co -branded handsets
sourced from global vendors as well. 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." Incidentally, China's
ZTE, which is looking to set-up a manufacturing unit in the country,
is expected to provide several Vodafone handsets in India. Earlier
this year, Vodafone penned a global low -cost handset procurement
deal with ZTE.

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 commercial service as Hutchison Max in November 1995.
Analjit Sing h of Max still holds 12% in company.
In Delhi, UP (E), Rajasthan and Haryana, ESSAR was the major
partner. But later Hutch took the majority Stake. By the time of
Hutchison Telecom's Initial Public Offering in 2004, 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. In 2006, it announced the acquisition of a company
(Essar Spacetel ² A subsidiary of Essar Group) that held licence
applications for the seven remaining licence areas.
In a country growing as fast as India, a strategic and well managed
business plan is critical to success. Initially, the company grew
its business in the largest wi reless markets in India ² in cities
like Mumbai, Delhi and Kolkata. In these densely populated urban
areas it was able to establish a robust network, well known brand
and large distribution network -all vital to long-term success in
India. Then it also tar geted business users and high -end post-paid
customers which helped Hutchison Essar to consistently generate
higher Average Revenue per User ("ARPU") than its competitors. By
adopting this focused growth plan, it was able to establish leading
positions in India's largest markets providing the resources to
expand its footprint nationwide.
In February 2007, 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 (befo re
costs, expenses and interests) of approximately US$11.1 billion .

The Rationale Behind The Deal :

The major rationales which led ³Vodafone´ to buy major stake in

³Hutch´ are:

gc 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.

gc Mobile penetration in India at the time of the deal was 13%

that was projected to exceed 50% (i.e 500 mi llion subscribers)
by 2012 while Hutch-Essar was having subscriber base of 24
gc The monthly mobil e subscriber addition in India wa s over 6
million, which wa s more than China¶s in September 2006.

Facts about Vodafone (figures represent data at the time of

the deal):

³Vodafone´ the name itself is very familiar as it is a multinational

giant. Vodafone was the largest telecom operator globally in terms
of revenues in the year 2006 with revenues of around $58 billion.
The group earned EBITDA of over $23 the previous year and had a
market capitalization of close to $160 billion.
The company is operated in 27 countries - either directly as an
operator or as an investor in o ther telecom companies. It had a
total customer base of 200 million (excluding Hutch -Essar)
approximatel y. Over and above this the company employed nearly
60,000 people wo rldwide. Thus, the acquisition wa s a strategic move
for Vodafone as it gave the company a strong presence in the fast
growing market of India.
About the Deal:

Vodafone emerged as the highest bidder for Hutchison ±Essar in the

bidding process. The telecom major agreed to acquire the stake held
by Hong-Kong based ³Hutchison Telecom International´ (HTIL) and its
associates in Hutch -Essar. The deal was finalized by HTIL Board and
an agreement had been signed, bringing the deal close to completion
after nearly three months since HTIL announced its decision to exit
Hutch-Essar. Although there were other bidders also namely R -ADAG
Flagship, Reliance Communications (the largest Indian CDMA mobile
operator) along with London based NRI business group The Hindujas,
in partnership with Qatar Telecom and Essar group. But they could
not bid as high as Vodafone did. Vodafone bought-out HTIL and its
associates, who h eld a combined 67% stake in Hutch-Essar for a cash
amount of $11.1 billion thus giving the company controlling powers.
It would also assume Hutch-Essar¶s net debt of $ 2 billion taking
the enterprise value to $ 18.8 billion. It so happened that Vodafone
had to pay a steep control premium as it expected the acquisition to
be earnings accretive after five years. 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, it provided immense growth opportunities for the company
since the addition in subscriber rate was also greater t han in
China. This growth rate wa s likely to stay that way for the next few

Above shown is a comparison table comprising the four major players

at the time of the conceptualization of the deal.
Taking three commonly employed yardsticks to compare the Vodafone-
Hutch Essar deal with its key mobile peers, Bharti & Reliance
Communications reveals the following :

gc Enterprise Value (EV)/Subscriber :

It is a popular metric for valuation in high growth markets as it

reflects the potential for cash flows. It explains how much one
subscriber contributes in the company¶s enterprise value. On an
enterprise value (Market Capitalization plus debt) per subscriber
basis, the Hutch -Essar deal is at a 15 -20% premium to its peers
(Bharti & Reliance). For instance, based on Hutch -Essar¶s implied
Enterprise value of Rs. 85000 Crores , applied on a mobile
subscriber base of 23.3 million as of December 31, 2006 the
EV/Subscriber works out to Rs. 36,300 vis -à-vis Rs. 31,800 for
Bharti¶s mobile segment.


This metric reflects the operational cash flows that can be

reinvested for growth. From an EV/EBITDA (earnings before
interest, depreciation, tax & amortization) standpoint too, the
deal works out to a premium of 25 -35% to Bharti and Reliance.
Compared to the EV/EBITDA of Bharti¶s mobile business, at 21
times, Hutch-Essar¶s works out to 28 time s.

gc EV/Revenue:

Based on this ratio too, the Hutch -Essar deal works out to a 20 -
30% premium over its peers .

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%.
Voting Rights Acquired :

British Telecom giant Vodafone would have a voting right for only
51.91% equity stake although it was paying for 67% stake. Vodafone
would only have an µeconomic interest¶ in the remaining 15.07%
equity stake. The voting right on this stake is with Analjit Singh,
Asim Ghosh and IDFC. The Essar Group of Ruias would continue to h old
33.02% as the Essar Group he ld 22.09% through a Mauritius based
Investment Company, which was counted as foreign holding in the
company and another 10.93% through a domestic subsidiary company.
The holding in Mauritius based company wa s also the reason for
Vodafone not to increase its stake to more than 51.91% since as per
the then FDI regulations for telecom companies, they could have had
only 74% foreign ownership, hence Vodafone would have to find local
investors for the remaining 26%. Key elements of the deal those we re
likely to play its strengths

gc Infrastructure Sharing with Bharti

Concurrent with the Hutchison Essar deal, Vodafone ha d entered

into an MOU for infrastructure sharing with Bharti Airtel which
had included sharing towers, shelter, civil works and back -haul
transmission. 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; the OPEX savings
were likely to improve the EBITDA margin by 1.5 % .

gc Future Expansions

Vodafone could plug Hutch Essar into its global procurement

chain, especially in the area of ultra -low-cost handsets.
Vodafone¶s 3G experiences in Europe were expected to help Hutch -
Essar get a competitive advantage in the 3G market place.
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. The department had made a claim of Rs 11,200 crore s
as capital gains tax after Vodafone bought the Indian operations
of Hutch for $11 billion three years back.
The Bombay High Court had ruled in favour of the I -T department,
following which Vodafone moved the Supreme Court. c The apex court
directed the telecom to provide a guarantee to the government and
deposit cash before hearing the case. Earlier, Vodafone was
considering an option of providing a counter guarantee from
foreign banks as security.
SC had directed Vodafone to provide a bank guarantee from a
nationalised bank and set aside Rs 2,500 crore s in cash with the
court. Vodafone has to offer l iquid collateral worth 110% of the
total guarantee amount of Rs 8,500 crore s to the bank. SBI is not
in favour of a counter guarantee from foreign banks as security.
Vodafone is in the final stage of negotiations with SBI for the
guarantee. The court has given the telecom company two months to
arrange for the guarantee.
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. Hutchison controlled its
Indian telecom subsidiary through a Cayman Islands firm called
CGP. CGP¶s shares were sold to Vodafone, which consequently
became a majority owner of the Indian telecom firm. The tax
authorities have so far disputed the contention and say Vodafone
should have deducted tax at source before paying Hutchison.