Abstract: Mergers and Acquisitions in Global Scenario is the way for the companies

to undergo the process of amalgamation, takeover, reconstruction and re-

organization. Mergers and Acquisitions are the leading corporate strategies followed
by organizations looking for improved value creation post- liberalization era, the
demand for intense growth and development in business has paved and profitability.
Merger is defined as a combination of two companies in to a single company where
one survives and the other loses their corporate existence. The survivor acquires all
the assets and liabilities of the merged companies. Acquisition is the process of
acquiring a company to build on strengths or weaknesses of the acquiring company.
A merger is similar to an acquisition but refers more strictly to combining all of the
interests of both companies into a stronger single company. The research paper
makes an attempt to examine the opportunities of Vodafone mobile industry, and
also emphasizes on comparative study of financial performance pre and post
merger. In achieving these objectives the research information is extracted through
literature review. The acquisition of Hutchison Essar of India by UK based Vodafone
was carried out which has marked the penetration of Vodafone into the Indian
telecom market and provided the opportunity to Vodafone to tap the huge potential
of expansion in India. The simplicity and comprehensive nature of the Hutch to
Vodafone transition campaign was a perfect example of the successful entry of a
new brand into a market.

Background

Indian telecommunication industry has seen many swings in the recent past. It has
remained stagnant under the government monopoly for many decades. Indian
telecommunication industry has become a classical example of combination of
government policies, innovation and new technology. There have been many events
of mergers and acquisitions in Indian telecommunication industry in the last decade.
Foreign investors and major players of telecom sector see India as one of the fastest
growing telecom industry of the world. Over the last decade, many reforms have
been introduced by the government, which have changed the scenario of telecom
industry of India. In telecom sector, mergers and acquisition has been increasing to
a great extent. Mergers and acquisitions in telecommunication industry can be
driven by the development of new technology. The deregulation of telecom industry
tempts the firms to offer bundle of new products and services to customers.
Ongoing convergence of cable and telecom industries also tempts telecom firms to
innovate products and services (Sanjoy Banka, 2006). In this way, the acquisition of
products and services has become a profitable progress for telecom firms. In the
world, telecommunication industry is the most developing and profitable industries
of the world. Telecom sector has been considered as the most indispensible
industries of the world in service sector. Different forms of communication media
such as mobile phones, land line phones and internet broadband services are dealt
in the telecommunication industry (Sanjoy Banka, 2006). In the recent past, swing
of mergers and acquisition has been observed in the telecom sector of the world.
Because of its immense importance, the proposed research is going to explore
mergers and acquisitions in the telecom sector of India.

PRE MERGER SCENARIO

VODAFONE S BACKGROUND

Vodafone is the worlds leading international mobile communications group with

operations in 25 countries across five continents and over 200 million proportionate
customers by the end of January 2007, as well as 36 partner networks.

Vodafone founded in 1983 as racal Telecom, and later as an Independent in 1991.Its

headquarters are in Berkshire, UK. It is the world's second-largest mobile
telecommunications company measured by both subscribers and 2011 revenues
behind China, and had 439 million subscribers as of December 2011.

Vodafone owns and operates networks in over 30 countries and has partner
networks in over 40 additional countries. Its Vodafone Global Enterprise division
provides telecommunications and IT services to corporate clients in over 65
countries. Vodafone also owns 45% of Verizon Wireless, the largest mobile
telecommunications company in the United States measured by subscriber

On July 2011, Vodafone Group agreed terms for the buy-out of its partner Essar from
its Indian mobile phone business. The UK firm paid $5.46 billion to its Indian
counterpart to take Essar out of its 33% stake in the Indian subsidiary. It will leave
Vodafone owning 74% of the Indian business, while the other 26% will be owned by
Indian investors, in compliance with Indian law. On 11 February, 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 8 May, 2007. It offers both
prepaid and postpaid GSM cellular phone coverage throughout India with good
presence in the metros.

Vodafone India provides 2.75G services based on 900 MHz and 1800 MHz digital
GSM technology. Vodafone India launched 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.

Products and Services offered by Vodafone

The products and services offered by Vodafone are- voice, messaging, data and
fixed broadband services through multiple solutions and supporting technologies to
deliver on its total communications strategy. The advancements in 3G networks and
download speeds, handset capabilities and the mobilization of internet services,
have contributed to an acceleration of data services usage growth.

Products promoted by the Group include Vodafone live!, Vodafone Mobile Connect
USB Modem, Vodafone Connect to Friends, Vodafone Eurotraveller, Vodafone
Freedom Packs, Vodafone at Home, Vodafone 710 and Amobee Media Systems.

On sept Vodafone acquired Hutchison Essar at at $13.3bn ($11.1 bn plus $2 bn

debt). Hutchison Essar valued at $18.8 bn 2007, controlling interest of 67% of
Holdings

2.4. About Hutch Essar

1992: Hutchison Whampoa and Max Group established Hutchison Max

2000: Acquisition of Delhi operations Entered Calcutta and Gujarat markets through

ESSAR acquisition

2001: Won auction for licences to operate GSM services in Karnataka, Andhra
Pradesh

and Chennai

2003: Acquired AirCel Digilink (ADIL - Essar Subsidiary) which operated in Rajastan,

Uttar Pradesh East and Haryana telecom circles and renamed it under Hutch

Brand

2004: Launched in three additional telecom circles of India namely 'Punjab', 'Uttar

Pradesh West' and 'West Bengal'

2005: Acquired BPL, another mobile service provider in India

Hutch Essar is a leading Indian telecommunications mobile operator with 23.3

million customers at 31 December 2006, representing a 16.4% national market
share. Hutch Essar operates in 16 circles and has licences in an additional six
circles. In the year to 31 December 2005, Hutch Essar reported revenue of
US$1,282 million, EBITDA of US$415 million, and operating profit of US$313 million.
In the six months to 30 June 2006, Hutch Essar reported revenue of US$908 million,
EBITDA of US$297 million, and operating profit of US$226 million. Up until January
2006, Hutch Essar had licences in 13 circles, of which nine have 900 MHz spectrum.
In January 2006, Hutch Essar acquired BPL, thereby adding three circles, each
operating with 900 MHz spectrum. In October 2006, Hutch Essar acquired Spacetel,
adding six further licences, with operations planned to be launched during 2007.
The results of Hutch Essar are prepared in accordance with Hong Kong Financial
Reporting Standards which may differ in material respects from the accounting
principles applied by Vodafone. Wherever you go, the network follows! Hutchs
famous punch line which was adapted appropriately in its much loved
advertisement turned out to be quite a pun as the Merger & Acquisition bug
followed and finally caught up with Hutch! Following an entire battle of give and
take, Vodafone acquired Hutch for a whopping 10 billion USD! Most of us would be
wondering, that why at all a company should acquire a rival? What are the gains
and risks involved in the entire transaction and how are mergers different from
acquisitions? February 12, 2007- Vodafone announces today that it has agreed to
acquire a controlling interest in Hutchison Essar Limited (Hutch Essar), a leading
operator in the fast growing Indian mobile market, via its subsidiary Vodafone
International Holdings B.V. Vodafone also announces that it has signed a
memorandum of understanding (MOU) with Bharti Airtel Limited (Bharti) on
infrastructure sharing and that it has granted an option to a Bharti group company
to buy its 5.6% direct interest in Bharti.

3. The Key Highlights Are

3.1. Acquisition of a Controlling Interest in Hutch Essar Vodafone announces it has

agreed to acquire companies that control a 67% interest in Hutch Essar from
Hutchison Telecom International Limited (HTIL) for a cash consideration of
US$11.1 billion (5.7 billion) Vodafone will assume net debt of approximately
US$2.0 billion (1.0 billion) The transaction implies an enterprise value of US$18.8
billion (9.6 billion) for Hutch Essar The acquisition meets Vodafones stated
financial investment criteria Infrastructure sharing MOU with Bharti Whilst Hutch
Essar and Bharti will continue to compete independently, Vodafone and Bharti have
entered into a MOU relating to a comprehensive range of infrastructure sharing
options in India between Hutch Essar and Bharti Infrastructure sharing is expected
to reduce the total cost of delivering telecommunication services, especially in rural
areas, enabling both parties to expand network coverage more quickly and to offer
more affordable services to a broader base of the Indian population Local partners
The Essar Group (Essar) currently holds a 33% interest in Hutch Essar and
Vodafone will make an offer to buy this stake at the equivalent price per share it
has agreed with HTIL Vodafones arrangements with the other existing minority
partners will result in a shareholder structure post acquisition that meets the
requirements of Indias foreign ownership rules 10% economic interest in Bharti
Vodafone has granted a Bharti group company an option, subject to completion of
the Hutch Essar acquisition, to buy its 5.6% listed direct interest in Bharti for
US$1.6 billion (0.8 billion) which compares with the acquisition price of US$0.8
billion (0.5 billion) If the option is not exercised, Vodafone would be able to sell
this 5.6% interest Vodafone will retain its 4.4% indirect interest in Bharti,
underpinning its ongoing relationship Commenting on the transaction, Arun Sarin,
Chief Executive of Vodafone, said: We are delighted to be deepening our
involvement in the Indian mobile market with the full range of Vodafones products,
services and brand. This announcement is clear evidence of how we are executing
our strategy of developing our presence in emerging markets. We have concluded
this transaction within our stated financial investment criteria and we are confident
that this will prove to be an excellent investment for our shareholders. Hutch Essar
is an impressive, well run company that will fit well into the Vodafone Group.

Sir John Bond, Chairman of Vodafone, said: India is destined to become one of the
largest and most important mobile markets in the world and this acquisition will
enable our shareholders to benefit from our increased investment in this market. We
also look forward to playing our part in delivering the significant economic and
social benefits which mobile telephony can bring to the people of India.

3.2. Principal Benefits

3.2.1. The Principal Benefits to Vodafone of the Transaction Are:

Accelerates Vodafones move to a controlling position in a leading operator in the

attractive and fast growing Indian mobile market India is the worlds 2nd most
populated country with over 1.1 billion inhabitants India is the fastest growing
major mobile market in the world, with around 6.5 million monthly net adds in the
last quarter India benefits from strong economic fundamentals with expected real
GDP growth in high single digits Hutch Essar delivers a strong existing platform in
India Nationwide presence with recent expansion to 22 out of 23 license areas
(circles) 23.3 million customers as at 31 December 2006, equivalent to a 16.4%
nationwide market share Year-on-year revenue growth of 51% and an ebitda
margin of 33% in the six months to 30 June 2006 Experienced and highly
respected management team Driving additional value in hutch essar Accelerated
network investment driving penetration and market share growth Infrastructure
sharing MOU with bharti plans to reduce substantially network opex and capex
Potential for hutch essar to bring vodafones innovative products and services to the
Indian market, including Vodafones focus on total communication solutions for
customers Vodafone and Hutch Essar both expected to benefit from increased
purchasing power and the sharing of best practices Increases Vodafones
presence in higher growth emerging markets proportion of Group statutory
EBITDA from the EMAPA region expected to increase from below 20% in the
financial year ending 31 March 2007 (FY2007) to over a third by FY2012
Operational plan for Hutch Essar Vodafone will execute an operational plan to
build on the strengths of Hutch Essar in order to capture the Indian telecom growth
opportunity.

4. Key Strategic

Objectives

In the context of penetration that is expected to exceed 40% by FY2012, Vodafone

is targeting a 20-25% market share within the same timeframe. The operational
plan focuses on the following objectives: Expanding distribution and network
coverage Lowering the total cost of network ownership Growing market share
Driving a customer focused approach Site sharing The MOU outlines a process
for achieving a more extensive level of site sharing and covers both new and
existing sites. Around one third of Hutch Essars current sites are already shared
with other Indian mobile operators and Vodafone is planning that around two thirds
of total sites will be shared in the longer term. The MOU recognizes the potential for
achieving further efficiencies by sharing infrastructure with other mobile operators
in India. The MOU envisages the potential, subject to regulatory approval and
commercial development, to extend the agreement to sharing of active
infrastructure such as radio access network and access transmission.

5. Financial Assumptions

As part of the operational plan, Vodafone expects to increase capital investment,

particularly in the first two to three years, with capex as a percentage of revenues
reducing to the low teens by FY2012. The operational plan results in an FY2007-12
EBITDA CAGR percentage around the mid-30s. Cash tax rates of 11-14% for FY2008-
12 are expected due to various tax incentives and will trend towards approximately
30-34% in the long term. As a result of this operational plan, the transaction meets
Vodafones stated financial investment criteria, with a ROIC exceeding the local risk
adjusted cost of capital in the fifth year and an IRR of around 14%.

5.2. Financial Impact on Vodafone

The transaction enhances Vodafones growth profile on a pro forma statutory basis,
with Vodafones revenue and EBITDA CAGR increasing by around one and a half
percentage points over the three year period to 31 March 2010. The transaction is
expected to be broadly neutral to adjusted earnings per share in the first year post
acquisition and accretive thereafter excluding the impact of intangible asset
amortization for the transaction. Including this impact, the transaction is expected
to be approximately seven percent dilutive to adjusted earnings per share in the
first year post acquisition and neutral by the fifth year. The Board remains
committed to its longer term targeted dividend payout of 60% of adjusted earnings
per share. Furthermore, the Board expects the dividend per share to be at least
maintained in the short term. The acquisition of HTILs controlling interest in Hutch
Essar will be financed through debt and existing cash reserves and Vodafone
expects pro forma net debt of around 22.8-23.3 billion3 at 31 March 2007 as a
result of this transaction. Further transaction details The transaction is expected
to close in the second quarter of calendar year 2007 and is conditional on Indian
regulatory approval. HTILs existing partners, who between them hold a 15%
interest in Hutch Essar, have agreed to retain their holdings and become partners
with Vodafone. Vodafones interest will be 52% following completion and Vodafone
will exercise full operational control over the business. If Essar decides to accept
Vodafones offer, these local minority partners between them will increase their
combined interest in Hutch Essar to 26%. In the event that the Bharti group
company exercises its option over Vodafones 5.6% direct interest in Bharti,
consideration will be received up to 18 months after completion of the Hutch Essar
acquisition. Vodafone will continue to hold its 26% interest in Bharti Infotel Private
Limited (BIPL), which is equivalent to an indirect 4.4% economic interest in
Bharti. Vodafone will now account for its entire interest as an investment. UBS
Investment Bank acted as financial adviser to Vodafone. One of only 4 major
mobile operators in India 5.3. Essar Was Biggest Hurdle in Deal for Vodafone
Relations between Hutchison and Ruias of Essar group have never been cordial.
Hutch and Essar have gone to the courts and the government several times in the
last few years over. Initially wanted complete control over company. Essar wants
equal partnership. The Ruias who have decided not to sell their stake have been
looking at legal options to challenge the HTIL claim opposed acquisition by
Vodafone.

6. Conclusion

1. Vodafone creating value in India. 2. Controlling position in a leading operator with

nationwide Presence. 3. Strong existing platform for growth. 4. Additional value
under Vodafone ownership 5. Increased Vodafones presence in high growth markets
6. Increased presence of big Global Players in India.

http://www.ijird.com/index.php/ijird/article/viewFile/85977/65905

Strategic intent

For the world's largest mobile service provider, the rationale for this deal springs
from:

Emerging market focus: Vodafone has lacked a cohesive emerging market strategy,
especially in India, the fastest growing mobile market. Considering that the monthly
mobile subscriber addition in India, at over 6 million, overtook China's in September
2006 and is likely to stay that way for the next few years, there was no choice for
Vodafone but to place India as the centre-piece of its emerging market strategy.

In outlining Vodafone's strategic priorities in May 2006, Mr Sarin had highlighted

that it would pursue "selective opportunities to extend footprint" in the emerging
markets. Following up on this strategy, Vodafone has snapped up Hutchison Essar,
which opens the gateway into the Indian market.

Fourth largest player: The acquisition of Hutchison Essar will make Vodafone the
fourth largest operator in the Indian mobile sweepstakes. Since mobile penetration
in India, at 13 per cent , is likely to exceed 50 per cent (at 500 million subscribers)
by 2012, the sector is probably at the starting block of a serious battle for mobile
market share.

Hutchison Essar's subscriber base, at 24 million, is only 1.5-2 million lower than the
state-owned Bharat Sanchar Nigam (BSNL) and 7-9 million lower than Bharti Airtel
and Reliance Communications. Considering the four-fold rise in market opportunity
and 6-7 million subscribers expected to be added every month, the competition,
which will ride on scale economies and innovative value-added services, will be
keenly watched.

High growth strategy

Vodafone, the world's largest mobile phone operator by revenue, has unveiled an
India-focussed, high-growth strategy for the next five years that will include bringing
ultra-low-cost handsets and wireless connectivity in the vast hinterland and "being a
good corporate citizen" now that it has acquired its greatly-fancied 67 per cent
stake in Hutchison Essar, India's fourth-largest mobile operator.

STRATEGIC GOALS

The aim of the company is to become the no.1 mobile communication in the world.
For this the company has six strategic goals:

1. To provide superior shareholder returns.

2. To delights it customer.

3. To leverage global scale and scope, especially in delivering 3G services.

4. To expand market boundaries.

5. To build the best global Vodafone team.

6. To be a responsible business and manage its impact on society, the

environment and economy.

Synergies Claimed
Vodafone gets access to the fastest growing mobile phone market in the world that
is expected to touch 500 million subscribers by 2010.

Cellular penetration in rural India is below 2%, but 67% of India's population lives in
rural India

Hutchison-Essar is not just the #4 player, but also one of the better-run companies
with higher average revenue per subscribers.

3G is set to take off in India, allowing data and video to ride on cellular networks.
Vodafone already offers 3G elsewhere in the world.

India is key to Vodafone strengthening its presence in Asia, a region seen as the big
telecom story.

https://www.ukessays.com/essays/marketing/case-on-merger-acquisition-of-hutch-
and-vodafone-marketing-essay.php

https://image.slidesharecdn.com/hutchvodafonecasestudy-160828054341/95/hutch-
vodafone-case-study-3-638.jpg?cb=1472363109

Financing the deal:

Vodafone has $5 billion from the sale of its Japanese unit for $15 billion last
year (the remaining $10 billion is expected to go back to shareholders).
It will also get $1.62 billion cash from its 5.6 percent stake sale in Bharti.
In addition, Vodafone has free cash reserves (for the first six months of 2006)
n excess of $3 billion.
It has also sold its 25 per cent stake in Swisscom Mobile and exited Belgium.

VODAFONES successful bid for Hutchisons 67 per cent stake in Hutch Essar
may have been driven by its compulsions to enter the high-growth Indian
market, but what clinched the deal for the UK-based company was the
enormous booty of cash at its disposal.
Analysts estimate that Vodafone was probably the least leveraged of all the
bidders and this helped them bid aggressively. It already has $5 billion from
the sale of its Japanese unit for $15 billion last year (the remaining $10 billion
is expected to go back to shareholders). It will also get $1.62 billion cash from
its 5.6 per cent stake sale in Bharti. This $6.62 billion may go towards funding
the $11.1-billion price tag for the 67 per cent stake.
In addition, Vodafone has free cash reserves (for the first six months of 2006)
in excess of $3 billion. It has also sold its 25 per cent stake in Swisscom
Mobile and exited Belgium. Therefore, the debt component in the deal is
likely to be low, according to an analyst.
Unconfirmed sources say that Reliance Communications was wary of raising
too much debt, which may have acted as a deterrent. Whether the UK-based
 telco overpaid is another question. Investment bankers in India, too, have
underlined Vodafones advantage, thanks to its access to cash and its
capability to strike the least leveraged deal. 1

Challenges to be faced

The cellular telephony is extremely competitive and India has one of the
lowest average revenue per user (ARPUs) in the world.
It has an uneasy equation with essar, which is one-third partner in Hutch-
Issar.
The Vodafone brand is relatively unknown in the Indian market which will
cause the brand to cost money and take time.
Telecom valuations are at a high and this could mean it is years before
Vodafone its multi-billion dollar investment.

Hutch is going to be a tough battle ahead as the worlds largest mobile

operator (by revenues) tries to woo the price-conscious Indian consumer.
Vodafone is targeting 100 million Indian subscribers in three years (Hutch has
24.41 million at present). Thats half its current subscriber base across 27
countries.
But getting there means adding between 1.5 million and 2 million subscribers
every month. While Hutch has been adding around 1 million subscribers a
month, market leader Bharti has been adding 1.75 million. Vodafone needs to
exceed Bhartis net subscriber additions to be the leader in three years.
Second, it needs to tap rural India in a big way. Vodafone has earmarked an
investment of $2 billion over the next couple of years to strengthen its
presence here. The agreement with Bharti fits in perfectly to tap the
hinterland.
Realising the importance of familiarity with the terrain, Sarin has opted to
retain Asim Ghosh as the man to head the venture. Once the board approves
it, Ghosh will formally take charge. After all, thats what he has been doing as
Hutchisons key lieutenant over the past few years. However, even before it
gets to that, Vodafone has to ensure that the Essar Group, the 33 per cent
partner in the venture, does not go to court on its entry. To insure against
such a possibility, Vodafone has reserved the right to abandon the acquisition
of the stake if litigation is launched.
Summing these challenges we have
The cellular telephony is extremely competitive, and India has one of the
lowest ARPUs in the world. Besides, ARPU growth is slowing.
It has an uneasy equation with Essar, which is one-third partner in Hutch-
Essar. Tht could be a source of problem.
The Vodafone brand is relatively unknown in the Indian market. Besides the
1 http://nrao-m-a-handbook.blogspot.in/2007/10/acquisition-of-hutchinson-essar-
by.html
brand will cost money and take time
Telecom valuations are at a high and this could mean it is years Vodafone
recovers its multi-billion dollar investment
Its big competitors are home-grown majors, who can manage the
environment better
Exit options
Ruias exercise call option, valuing company at Rs 67,000 cr
The bosses in Vodafones headquarters in UKs Newbury will surely be
breathing easy, with the Ruias of Essar deciding to sell their 33 per cent stake
in Vodafone Essar for $5 billion in cash.
The deal is expected to end the dispute between the two partners over the
valuation of Essars minority stake in the company, which has 130 million
subscribers and is the third-largest telecom operator in India.
In a surprise move, Essar on Thursday decided to exercise its underwritten
put option for a 22 per cent stake, which, Vodafone spokesperson said would
automatically give them the right to exercise a call option for the residual 11
per cent stake, two months before the option window was to close.
An Essar spokesperson refused to comment saying it was bound by
confidentiality obligations under its agreement with Vodafone.
In 2007, Vodafone granted options to Essar, giving it the right to sell its entire
stake for $5 billion or to dispose of a part of the stake at a value arrived at by
an independent entity.
But in January, Vodafone objected to Essars plan to place a part of its 33 per
cent stake 10.93 per cent to be precise in India Securities, a small public
company. Vodafone feared this would inflate the market value
of Vodafone Essar.
A call option gives an investor the right but not the obligation to buy a stock,
bond, commodity or any other instrument at a fixed price within a specific
period. A put option gives the owner the right but not the obligation to sell a
certain amount of an underlying security at a specified price within a fixed
time.
The $5-billion deal values Vodafone Essar at $15.1 billion (around Rs 67,000
crore). This does not include any debt that Vodafone Essar has on its books,
as the number is not available.
Vodafone, the worlds largest mobile operator by revenue, held 67 per cent in
the company. It paid $11.1 billion for the stake in 2007 in what is till now the
largest foreign direct investment (FDI) in India. It had valued the Indian
business at $19.3 billion, which included over $1 billion debt.
The Vodafone Groups published net debt figure includes the $5 billion it will
pay to Essar. The exercise, said Vodafone officials, would be concluded by the
end of 2011.
It is not clear to what extent Vodafone will have to divest stake through an
initial public offer (IPO). The other option is for Indian shareholders in the JV
Analjit Singh and IDFC to raise stakes
marginally. Vodafone spokesperson Ben Padovan said Vodafones stake would
go up to over 75 per cent after the deal.
To maintain compliance with the Indian regulations, we could go for
an IPO for the one per cent stake or scout for an Indian partner, he added.
Out of the 67 per cent stake, Vodafone holds 42.4 per cent directly, while
24.6 per cent is held by the Indian entities of Analjit Singh and IDFC in
which Vodafone is a minority shareholder. This 24.6 per cent stake is
considered Indian.
At present, FDI norms allow a foreign entity to own 74 per cent stake directly.
Out of the balance 26 per cent, a foreign entity can own up to 49 per cent,
but the majority 51 per cent has to be in Indian hands.
Out of Essars 33 per cent stake, 10.97 per cent is with Indian
entity Essar Telecommunications Holdings Pvt. Ltd (ETHPL), while the
remaining 22.03 per cent is held by an overseas entity, the Mauritius-
based Essar Communications (Mauritius) Ltd, another private company
owned by the promoters.
Essars move to reverse-list ETHPL with a listed Essar group entity, India
Securities Ltd (ISL), in January this year faced opposition from Vodafone and it
was claimed the Ruias were wrongfully trying to extract a fair market
valuation by spreading misinformation. The Ruias own a little over 74.22 per
cent in ISL.
The case is in the Chennai High Court. But sources said for all practical
purposes the matter was almost dead.

RUIAS TELECOM RUN

1996-1997: Ruias enter telecom after a deal with C

Sivasankaran. Essar gets Sterling Cellular & Aircel Digilink from
Sivasankaran, who gets Tamilnad Mercantile Bank from the Ruias

1999-2000: Hutch Essar JV formed after Hutch acquires 49% in Sterling

Cellular from Swisscom

2002: Hutch-Essar bids successfully for 4th licence in AP, Karnataka, and
Chennai

2003: Essar transfers Aircel Digilink to Hutch-Essar JV

2005: All entities under Hutch-Essar consolidated. This includes

Hutchison-Max in Mumbai, Usha-Martin Telecom Calcutta and Fascel in
Gujarat

2005: Hutch-Essar acquires BPL (Maharashtra, TN, Kerala). BPLs Mumbai

circle also part of the deal, but goes into litigation
2005-06: Other minority shareholders, Max Group, Kotak Group &
Hindujas, exit Hutch-Essar JV

2007: Vodafone acquires Hutchison stake in Hutch-Essar JV for $11.1

billion, JV renamed VodafoneEssar

2011: Essar exercises put option to exit JV

With 771 million mobile subscribers in January, India is the worlds second-
biggest market for mobile services. It is also the fastest-growing, with
monthly subscriber additions averaging 19 million in 2010.
Vodafone has faced many challenges, from high spectrum costs, an ongoing
dispute over tax and an increasingly conflicting relationship with its main
Indian partner. Vodafones case is often cited as an example of a high-profile
foreign company facing hostile environment after coming into India.
In May 2010, Vodafone took a hit on its market valuation in India by $3.70
billion due to fierce competition and escalating spectrum costs and signalled
increasing frustration with the country.
The exit of the Ruias comes as good news for Vodafone, which is facing a tax
claim of $2.5 billion on the 2007 deal. Vodafone has repeatedly insisted that
no tax is due on the transaction.

http://www.business-standard.com/article/technology/essar-exits-vodafone-
for-5-bn-111040100124_1.html

The worlds biggest mobile phone company, Vodafone Group, moved a step
closer to acquiring a controlling 67% stake in Hutchison-Essar, Indias fourth-
largest cellular telephony company.
On Thursday, the company signed a shareholder agreement with local
partner Essar Group, which owns 33% of Hutch-Essar, and sighted regulatory
approval in two weeks.
Last month, Vodafone agreed to buy 67% in Hutchison Essar for $11.1 billion
in cash, buying out the Hutchison Telecommunications International Ltd
(HTIL) stake in the Indian venture. The deal has been approved by HTIL
shareholders. Essar has got a sweetheart deal from Vodafone.
The Mumbai-based business group will have an put option to sell its 33%
stake in the phone firm for at least $5 billion (Rs22,100 crore), not including
any debt liabilities, between the third and fourth years of the deal.
Separately, HTIL will pay Essar $373.5 million on completion of the stake sale
to Vodafone, and a further $41.5 million within two years, the Hong Kong
company said in a statement.
Both partners will have the first right to buy each others equity, should either
of them decide to sell, heads of the companies said. We dont think the
valuation of the company (after three years) is going to be anywhere near
that ($5 billion), it will be much higher. The option is only to protect against
any downside, Essar Groups vice-chairmanRavi Ruia told reporters.
Indias central bank is studying representations and documents from
Vodafone, HTIL and the Essar Group on the foreign ownership in Hutchison
Essar. The Reserve Bank of Indias reply to the government will be put before
the Foreign Investment Promotion Board, which approves foreign investments
in some sectors. The board will then take a decision on Vodafones India
plans.
Commerce and industry minister Kamal Nath called the deal a win-win for
India and Vodafone after a meeting with Ruia and Arun Sarin, chief executive
of Vodafone.
The proposed deal ran into rough weather with a non-governmental
organization alleging in a Delhi court that the foreign holding in Hutchison
Essar exceeded the 74% ceiling mandated by the government. About two-
thirds of Essars 33% ownership of Hutchison Essar is owned through foreign
investment companies controlled by the Indian groups promoters, the Ruias.
Vodafone is acquiring HTILs foreign equity stake of around 52% and another
indirect stake of 15% held by two individualsHutchison Essar chief
executive Asim Ghosh and New Delhi businessman Analjit Singhin
Hutchison Essar. The 15% ownership, the NGO says, is foreign since it will
represent Vodafone.
Analysts said the Ruias did not want to reap gains from their telecom
investment just yet. Though under the terms of the agreement with HTIL,
Essar would have been able to sell their stake for a higher amount, they seem
to have their interest set on the longer term valuation, said Vishal Malhotra,
partner at auditor Ernst & Youngs India offices.
The takeover of Hutchison Essar will expand Vodafones worldwide
subscribers by 8.4% but increase its revenues by just 3.33%, given that
Indian mobile-phone customers pay as less as Rs350 a monthjust a fifth of
European billings.
Investors are worried whether the firm will be able to achieve its operational
targets for India. What everyone is looking forward to is how Vodafone
intends to move from No.4 to No. 1 (in India) and capture 20-25% they are
talking about, said Damien Chew, European telecom analyst for ING Equity
Markets in London.
Vodafones revenues for fiscal 2007, ending 31 March, is expected at nearly
$60 billion and Ebitda (earnings before interest, taxes, depreciation and
amortization) at $23.6 billion. Hutchison Essar reported an Ebitda of $297
million on revenues of $908 million in the first six months of 2006.
On receiving regulatory approval, Hutchison Essar will be renamed Vodafone
Essar, Sarin said, ahead of phasing out the Hutch brand and replacing it with
Vodafone. Ghosh will continue as its CEO
http://www.livemint.com/Home-Page/ukMoIps6b5Tcz2EkwHAW1L/Vodafone-
inks-deal-with-Ruias-on-HutchEssar.html
The deal, agreed today, frees Vodafone to operate independently in the
crucial territory, but some analysts have baulked at the hefty price tag placed
on Essars 33pc stake.
Vodafone and Essar initially went into business together in 2007 when
Vodafone purchased a 67pc interest in Hutchison Whampoas Indian telecoms
business, in which Essar already had a share.
The agreement allowed Vodafone to enter the Indian market for the first time
but got off on the wrong foot because of an inherited dispute between
Hutchison and Essar over the ownership of small mobile company BPL Mobile
Communications.
It has been fraught with difficulty ever since. The British telecoms giant has
clashed repeatedly with the Ruia family, which controls Essar, over decisions
which it claims stand to benefit the wider Essar Group at the expense of their
telecoms joint venture.
In January Vodafone went so far as to complain to the Bombay Stock
Exchange and take legal action over Essars decision to reverse a third of its
telecoms arm into its highly illiquid financial business India Securities a
move which Vodafone said would affect the Vodafone Essar business.
Meanwhile Essar has accused Vodafone of trying to squeeze it out of the joint
venture, at the same time as wrangling over the price of its share of the
company.
When the Vodafone Essar joint venture was initially formed, it was valued at
$18.8bn, and Essar retained a put option to sell its entire 33pc stake for
$5bn by May 2011.
Fridays deal is $460m above that figure, $880m of which will be withheld for
tax which Essar believes it can later recover.
However, the agreement sees a total severing of ties between Vodafone and
Essar, which have put an end to all outstanding legal claims between them,
and allows Vodafone certainty and flexibility in the Indian market, the
company said.
Analysts were broadly positive about the development. Will Draper at Espirito
Santo said: It is $460m more expensive than expected but it gives Vodafone
full, undisputed control, and releases them from a relationship which was
fractious from the word go. There was bad blood on both sides.
It also nudges Vodafone above the 74pc threshold for the direct shareholding
a non-Indian company is allowed to hold in an Indian company, meaning it
has to find an Indian buyer for the surplus shareholding

http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandteleco
ms/telecoms/8611461/Vodafone-buys-Essar-out-of-Indian-JV-for-5.46bn.html
8.3) Essars Options: - Technically, Essar has three options: stay on with
Vodafone, sell the entire stake, or sell part of its stake. In case Essar wants to
exit, Sarin points out that it will be paid the same price that Vodafone offered
to Hutch. Or else, it could work with Vodafone to build the company and find
a right place and time to exit. However, Vodafone has reportedly reserved the
right to walk out of the deal if litigation to thwart the deal is launched. In case
Essar decides to leave, Vodafone has to maintain the 74 per cent FDI limit.
Hutchison held 52 per cent; Analjit Singh and Asim Ghosh together hold 15
per cent, while Essar holds 33 per cent. In Essars stake, 22 per cent is held
abroad (Mauritius) as a foreign investor, and the balance 11 per cent as a
domestic investor. Technically, therefore, Vodafone can pick up another 22
per cent.
https://www.worldwidejournals.com/indian-journal-of-applied-research-
(IJAR)/file.php?val=July_2012_1356959339_aaddd_File37%20.pdf

Background Note
Vodafone

Vodafone, based in the UK, was the world's largest mobile communications
company by revenue. It operated under the brand name 'Vodafone'. The
brand name 'Vodafone' comes from 'Voice data fone', reflecting the
company's wish to provide voice and data services on the mobile phones.
Vodafone operated in Europe, the Middle East, Africa, Asia Pacific, and the
US...

Mobile Telephony in India

The mobile telephony
revolution started in India when
the GoI decided to allow private
sector participation in the
Indian telecom sector. The new
telecom policy of 1994
envisioned provision of world
class telecom services at least
to those who could afford to
pay for them.

In 1994, licenses were issued

by Department of
Telecommunications (DoT) to
the private operators to start
mobile services in the four
metropolitan cities of Delhi,
Mumbai, Chennai, and Calcutta
(now Kolkata)...

Vodafone Eyes Hutchison Essar

In 2006, GoI raised the FDI limit in the telecom sector from 49% to 74%. The
government increased the FDI limit in the sector after protracted lobbying by
telecom players who were in dire need of capital...

Other Contenders for the

Bid
Vodafone wasn't the only
company eyeing HEL, however.
The fast growth of the Indian
mobile market coupled with a
relatively low penetration level
made it a very lucrative
market.

So it was no wonder that

Vodafone's announcement
started the race for the
acquisition of HTIL's stake in
HEL among several interested
players.

Some of the important players

in the fray were Reliance,
Bharti Airtel, Essar and
Orascom.
The Slugfest

Before initiating the bidding

process, Vodafone had to clear
many regulatory issues.

Bharti Airtel, in which Vodafone

had a 10% stake, asked its
partner to make it clear
whether Vodafone wanted to
continue its relation with it.

Moreover, as GoI's telecom

policy allowed only 74% of FDI
into the sector, 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...

Business Strategy | Case Study

in Management, Operations,
Strategies, Business Strategy,
Case Studies
The Aftermath

On March 22, 2007, Vodafone

signed a shareholder
agreement with its Indian
partner, Essar, according to
which Vodafone would hold a
52% and Essar would continue
to hold a 33% stake. Some
other minority shareholders,
such as Asim Ghosh (Ghosh),
Infrastructure development
finance company (IDFC) and
Analjit Singh together would
continue to hold the remaining
15 per cent stake in the
company...

Outlook

Vodafone planned to bring

world class branding to India
after the 'Hutch' brand was
replaced by the Vodafone
brand name. Vodafone wanted
to build up its numbers in the
Indian market mostly by
expanding into the rural areas.

Vodafone also wanted to launch

a 3G service in the Indian
market as soon as the
government declared the 3G
policy. Rather than using the
3G services as a premium
product targeted at upscale
segment, Vodafone wanted to
take 3G to the rural areas to
provide hi-speed data services
to the rural masses...