Hutchison Essar Deal

Hutchison Essar Limited (HEL) is India’s fourth largest wireless operator (third largest privately-owned), with a subscriber base of 22 million. Indubitably then, it has evinced substantial interest in the sale of the assets of HEL from several global and domestic corporations.What’s the Fuss about? Li Ka-shing, the promoter of Hong Kong based $3.13 billion Hutchison Telecom International (HTIL) which owns 67% holding in HEL (19.55% is indirectly held via a company called Telecom Investments India) has indicated that he wants to sell his stake in the company.Use of proceeds: The $20 billion valuations that are being bandied about work out to roughly 48 times EBIDTA earnings and HTIL’s share amounts to a gargantuan $10 billion which Li plans to use to bankroll his 3G global rollout plans.Advisors: Goldman Sachs is advising HTIL on this deal, and Essar is being advised by JM Morgan Stanley.Reasons for interest in the stake: India is the fastest growing cellular market in the world with a subscriber base of 143 million cellular phone users growing at a 5% month on month basisPenetration levels are low at 12% (Less than 2% in rural areas).Hutch commands leadership positions in Mumbai, Kolkata and Gujrat, is present in 16 out of 23 circles, and has average revenues per user higher than the industry average of Rs. 335.The contenders include:Reliance Communications (owned by Anil Ambani)- India’s second largest mobile operator – a successful bid would topple Sunil Mittal, and render Reliance as the undisputed leader with a 36.8% market share and over 50 million subscribers and help it create a GSM footprint. Also, as against setting up its own Greenfield pan-India GSM network, it can save $5 billion in capital expenditure and $3.5 billion in operating expenditure over the next 5 years. He will be teaming up with the Carlyle Group for the acquisition.The Essar Group: The steel and oil-refining Company owned by The Ruia family already owns 33% in HEL via its holding company Essar Teleholdings Ltd. It may decide to be a buyer, partner or seller, depending on whether it can secure the best valuation for its stake. If it decides to be a seller, any foreign player will need a local partner – as foreign ownership in telecoms is capped at 74%, courtesy Chidambaram. The Ruia’s also hold the right to first refusal in the event of HTIL’s stake falling below 40% and HTIL selling more than 10% to Reliance, Tata or Bharti.Vodaphone: The largest mobile company in the world spread across 26 countries, with partner networks in another 34 countries having over 190 million subscribers is eyeing the Hutch stake as the markets of UK, Germany and Australia are saturated and it wants to increase its limited Asia presence (3.3% in China Mobile and 10% in Bharti Airtel). CEO: Arun Sarin was in India recently to further the process.Verison (Unlikely bidder) The US based second largest CDMA cellular operator having 57 million customers and has Vodaphone as a 44% JV Partner. Since its presence is limited to the US, it is looking at expanding its presence overseas.Maxis (Malaysia’s largest operator with over 7 million subscribers) It had put in a $13.5 billion bid with PE player Texas Pacific Group for a 100% stake in Hutchison Essar, but may have dropped out of the race. It had earlier acquired 74% in the C. Sivasankaran promoted Aircel in late 2005. Hutch-Essar would give it a pan-India footprint and supplement its India operation which currently has 4.2 million subscribers.Orascom (Unlikely bidder): Egyptian Telecom Company which owns 19.3% of Li’s Hutch Telecom (not Hutch-Essar). If Reliance, Vodafone, and/or the PE firms encounter resistance from the Ruia’s and decide to buy in to the parent company, Orascom (claims it) has right of refusal.The Hinduja family: They originally held a 5.11% stake in Hutch-Essar which they sold in mid 2006 for $450 million. Cash is not a problem for them as they have global revenues of $11 billion. They are looking at expanding into telecom in India.Other likely bidders are Russia’s Sistema, Spain’s Telephonica and Telenor which has presence in the Nordic region and other parts of Europe, Malaysia, Thialand, Bangladesh and Pakistan.