The Hutchison Essar Acquisition: Vodafones Foray into an Emerging Market

Vodafones Foray Into India

Vodafone was looking to enter Indian market. But FDI Policies Were not Favorable On Feb 11, 2007 a Vodafone Group Plc an UK Based Telecom Company Acquired Hutchison Essar LTD (HEL). Vodafone Bought A 52% Stake for US$ 11.1billion from Hutchison Telecom International. Hutchison Essar Was Valued at US$ 19.3 Billion. There Were Several Competitors like Reliance Communication, Essar and Hinduja Group. The Biggest Deal Ever in the Indian telecom industry.

Cont..
HEL had an 29.2million Subscriber base in july 2007 and had an PAN INDIA Presence in 13 of total 28 circles in the country. Also had highest ARPU of Rs.340.15. The Final Deal Price was a discounted amount of US$ 10.9 billion. The Acquisition realized Vodafones desire to enter emerging markets in a big was as a counter to the markets developed countries that were saturated.

Background -Vodafone
Vodafone was established in 1982 when Racal Strategic Radio Plc, a subsidiary of Racal Electronics Plc. Later it was de-merged from Racal Electronics and named the Vodafone Group in 1991 by accounting its 20 percent shares of its value in to London stock Exchange. During its expansion in overseas it purchases Air Touch Communication Inc in the US and changed its name to Vodafone Air Touch Plc.

Hutchison Essar Ltd

HEL was one of the leading mobile operators in India. It was the fourth largest service provider in terms of customer numbers. HEL was a Joint venture between HTIL and Essar. They started their services under the brand name Hutch in 1994 after it acquired the cellular license for the Mumbai circle. The company was initially set up as a joint venture between HTIL and Max India Ltd. In July 2005, Essar bought a 64 percent stake in BPL Cellular Ltd. for US$ 1.156 billion, making it the largest ever acquisition in the Indian telecom sector at that time

The Slugfest
Before initiating the bidding process, Vodafone had to clear many regulatory issues. Stake with Bharti Airtel of 10%. Clearances from regulatory bodies like FIPB, TRAI. Essar made a bid of US $ 11 billion to acquire remaining 52% stake in HEL. Priority as already a partner in the venture.
Other contenders in race. Essar Group Anil Ambani-owned Reliance Communications The UK-based Vodafone Private equity (PE) players. Malaysias Maxis Communications Egyptian Telco Orascom

The Aftermath
On March 22, 2007, Vodafone signed a shareholder agreement with its Indian partner, Essar, according to which Vodafone - 52% Essar- 33% Minority shareholders, such as Asim Ghosh (Ghosh), Infrastructure development finance company (IDFC) and Analjit Singh together holds 15 per cent stake in the company.

Vodafone and Essar came to an agreement to run HEL jointly and agreed to change the name of the company to Vodafone Essar. Vodafone sold back to Bharti its 5.6% direct stake in Bharti for US $ 1.6 bn.

Outlook
Vodafone planned to bring world class branding to India after the 'Hutch' brand was replaced by the Vodafone. Vodafone wanted to take 3G to the rural areas to provide hispeed data services to the rural masses Invest US $ 2 billion to expand its reach in rural areas. Introduce ultra-low cost handsets in the rural market, procured from China.

Porters Five forces Analysis

Rivalry against Existing competitors

The major competitors were: 1. BSNL & MTNL(State Owned companies) 2. Reliance telecommunications, Bharti Airtel, Essar and Orascom (Private India Owned Companies)

Bargaining Power of Customers

There was no such provision as the tariffs were decided by the company itself or in other words service providers were the main drivers.

Bargaining power of suppliers

Mobile handset providers: Vodafone took low cost handsets from ZTE. Software providers had a strong bargaining power.

Threats from new entrants

Uninor Stel DOCOMO MTS

Threats from substitutes

Landline market in rural areas mainly provided by BSNL being a substitute of mobile technology was a threat to Vodafone.

SWOT Analysis
Strength: Vision to become global leader Good & strong relationship with customers Best & latest Technologies Weakness: Shortage of expensive and costly material Meeting needs of each and every customer was a difficult task

SWOT Analysis
Opportunity: Targeting and expanding into rural area To become a pan- Indian operator like BSNL etc Introduce several ultra low cost handsets Threat: Competitors New entrants Change in service as a change in taste.

What, according to you, promoted Vodafone to expand into the emerging markets? Do you think Vodafones acquisition of Hutchison Essar will help it in this regards?

Fast growth industry in Indian mobile market 3G services with high speed data services widely spread in Indian market In terms of making heavy profit

Critically analyze Vodafones decision to acquire Hutchison Essar. Discuss whether it would have been more beneficial for Vodafone of it had started business on its own from scratch rather than acquiring Hutchison Essar? Hutchison Essar deal was overpaid FDI allowed 74% stake of foreign companies in telecom sector. Which could have helped them to get started services of their own

Discuss HTILs strategy of exiting the highly lucrative Indian market after it has developed business in India from scratch?
700% return on its investment in India Exit was well timed With future expansion, HTILs investment would have been non profitable

Thank You !!!!