1.

INTRODUCTION

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect
of corporate strategy, corporate finance and management dealing with the
buying, selling and combining of different companies that can aid, finance, or
help a growing company in a given industry grow rapidly without having to
create another business entity.
The rationale behind growth through merger or acquisition is that 1 + 1 = 3:
the combined company is more valuable than the sum of the two separate
companies. This rationale is attractive to companies facing competitive
pressures. To grab a bigger share of the market and improve profitability,
companies will want to become more cost efficient by combining with other
companies.
1.1 MOTIVES BEHIND MERGER & ACQUISTIONS

The dominant rationale used to explain M&A activity is that acquiring firms seek
improved financial performance. The following motives are considered to
improve financial performance:

 Economy of scale: This refers to the fact that the combined company can often
reduce its fixed costs by removing duplicate departments or operations,
lowering the costs of the company relative to the same revenue stream, thus
increasing profit margins.
 Economy of scope: This refers to the efficiencies primarily associated with
demand-side changes, such as increasing or decreasing the scope of marketing
and distribution, of different types of products.
 Increased revenue or market share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by capturing
increased market share) to set prices.
 Cross-selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up
the bank's customers for brokerage accounts. Or, a manufacturer can acquire
and sell complementary products.

~1~
 Synergy: For example, managerial economies such as the increased
opportunity of managerial specialization. Another example are purchasing
economies due to increased order size and associated bulk-buying discounts.
 Taxation: A profitable company can buy a loss maker to use the target's loss as
their advantage by reducing their tax liability. In the United States and many
other countries, rules are in place to limit the ability of profitable companies to
"shop" for loss making companies, limiting the tax motive of an acquiring
company. Tax minimization strategies include purchasing assets of a non-
performing company and reducing current tax liability under the Tanner-White
PLLC Troubled Asset Recovery Plan.
 Geographical or other diversification: This is designed to smooth the
earnings results of a company, which over the long term smoothens the stock
price of a company, giving conservative investors more confidence in investing
in the company. However, this does not always deliver value to shareholders.
 Resource transfer: resources are unevenly distributed across firms (Barney,
1991) and the interaction of target and acquiring firm resources can create
value through either overcoming information asymmetry or by combining scarce
resources.
 Vertical integration: Vertical integration occurs when an upstream and
downstream firm merges (or one acquires the other). There are several reasons
for this to occur. One reason is to internalize an externality problem. A common
example is of such an externality is double marginalization. Double
marginalization occurs when both the upstream and downstream firms have
monopoly power; each firm reduces output from the competitive level to the
monopoly level, creating two deadweight losses. By merging the vertically
integrated firm can collect one deadweight loss by setting the downstream
firm's output to the competitive level. This increases profits and consumer
surplus. A merger that creates a vertically integrated firm can be profitable.
 Absorption of similar businesses under single management: similar
portfolio invested by two different mutual funds (Ahsan Raza Khan, 2009)
namely united money market fund and united growth and income fund, caused

~2~
 the management to absorb united money market fund into united growth and
income fund.
 However, on average and across the most commonly studied variables,
acquiring firms' financial performance does not positively change as a function
of their acquisition activity. Therefore, additional motives for merger and
acquisition that may not add shareholder value include:

➢ Diversification: While this may hedge a company against a downturn in an

individual industry it fails to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversifying their portfolios at a
much lower cost than those associated with a merger. (In his book One up on
Wall Street, Peter Lynch memorably termed this "diworseification".)
➢ Manager's hubris: manager's overconfidence about expected synergies from
M&A which results in overpayment for the target company.
➢ Empire-building: Managers have larger companies to manage and hence more
power.
➢ Manager's compensation: In the past, certain executive management teams
had their payout based on the total amount of profit of the company, instead of
the profit per share, which would give the team a perverse incentive to buy
companies to increase the total profit while decreasing the profit per share
(which hurts the owners of the company, the shareholders); although some
empirical studies show that compensation is linked to profitability rather than
mere profits of the company.

2. RECENT TRENDS IN INDIA

INDIA Inc seems to have regained its deal-making appetite with merger and
acquisitions so far this year nearing the $50 billion level – already over three
times the total for entire 2009. There were merger and acquisitions deal worth
about $16 billion in 2009, down from close to $40 billion in 2008. Indicating that
deal valuations are also witnessing a revival in line with the recovery in stock
markets and overall economy, the value of M&A deals has risen despite a

~3~
decline in the number of transactions. According to data compiled by research
firm VCCEdge the M&A deal value rose nearly five-times to $5.4 billion in July
2010 alone from $1.1 billion in July 2009.

So far in 2010, that is between January and July, the cumulative M&A
deal value have touched $49.7 billion as compared to $16.3 billion in the whole
of 2009 VCCEdge said in its monthly deal report. There have been 411 M&A
deals so far this year, down from 453 deals seen in 2009, the report noted. July
also saw fewer deals at 42 as compared to 47 in July, 2009. However, when
compared to June 2010, a substantial drop was seen in both the deal value and
volume. The deal value fall by 62% and the number went down by 34%.

Indian companies had announced 64 M&A deals in June 2010 with a total
value of nearly $14.1 billion. The biggest month in terms of M&A deals so far this
year has been March which saw 72 deals worth a total of $14.35 billion.
VCCEdge further pointed out that the number of domestic deals decreased from
26 in July 2009 to 21 in July 2010. But the value of domestic deals went up to
$2.03 billion last month from $282 million in July 2009. In terms of volume the
number of outbound deals fell from 12 in July 2009 to eight in July 2010 while
there were eight inbound deals in each of the two months. The value of inbound
deals still rose sharply year-over-year to $2.01 billion in July 2010 from $744
million.

The number of M&A deals recorded an increase to 60 from 43 during the

corresponding period. The cross border outbound, domestic and inbound M & A
deals occupied a 48.55 per cent, 39.43 per cent and 12.02 per cent share with
28, 27 and 5 number of deals respectively.

One of the highlights of this quarter’s M&A activity was the phenomenal rise in
outbound deals, while a decline in inbound deals. A total of 28 outbound and 5
inbound deals were recorded in India during the quarter. This just goes to show
that Indian companies are increasingly expanding their wings beyond Indian
shores and creating a strong position of Indian companies in the world.

~4~
 Mergers & Acquisition Deals in India for first financial
quarter 2010

Sector No. of Deals Value in USD million Share in per cent

Telecom 3 22732.26 67.19

Pharmaceutical 4 3958.29 11.02

BFSI 6 2651.54 7.84

Metal and Mining 4 1483.15 4.38

Energy 4 1320 3.90

Other sectors 39 1919.00 5.67

M&A activity in India is back with a bang on back of mega Telecom Industry
deals involving Indian companies. According to figures released
by ASSOCHAM, Mergers &Acquisition deals valued at USD 33.83 billion were
executed during just the first quarter of financial year 2010, a growth of about
257% over corresponding quarter last year, which registered deals worth USD
9.49 billion (April – June 2009). The Telecom Industry took the largest pie of M&A
activity, accounting for deals worth USD 22.73 billion, which represented 67.19
per cent share in the total valuation of the M & A deals. The other sectors like
pharmaceutical, banking and finance, metal and mining, energy, steel, cement,
media and entertainment, aviation, real estate, IT and ITES, consumer durables,
and hospitality witnessed 57 M & A deals pegged at USD 11.1 billion,
contributing a total share of 32.81 per cent.

~5~
3. INDIAN TELECOM SECTOR

Introduction
The telecom services have been recognized the world-over as an important tool
for socio-economic development for a nation. It is one of the prime support
services needed for rapid growth and modernization of various sectors of the
economy. Indian telecommunication sector has undergone a major process of
transformation through significant policy reforms, particularly beginning with the
announcement of NTP 1994 and was subsequently re-emphasized and carried
forward under NTP 1999. Driven by various policy initiatives, the Indian telecom
sector witnessed a complete transformation in the last decade. It has achieved a
phenomenal growth during the last few years and is poised to take a big leap in
the future also.
Status of Telecom Sector
The Indian Telecommunications network with 621 million connections (as on
March 2010) is the third largest in the world. The sector is growing at a speed of
45% during the recent years. This rapid growth is possible due to various
proactive and positive decisions of the Government and contribution of both by
the public and the private sectors. The rapid strides in the telecom sector have
been facilitated by liberal policies of the Government that provides easy market
access for telecom equipment and a fair regulatory framework for offering
telecom services to the Indian consumers at affordable prices. Presently, all the
telecom services have been opened for private participation. The Government
has taken following main initiatives for the growth of the Telecom
Sector:
✔ Liberalization - The process of liberalization in the country began in the
right earnest with the announcement of the New Economic Policy in July
1991. Telecom equipment manufacturing was delicensed in 1991 and value
added services were declared open to the private sector in 1992, following
which radio paging, cellular mobile and other value added services were
opened gradually to the private sector.

~6~
✔ National Telecom Policy 1994 - In 1994, the Government announced the
National Telecom Policy which defined certain important objectives,
including availability of telephone on demand, provision of world class
services at reasonable prices, improving India’s competitiveness in global
market and promoting exports, attractive FDI and stimulating domestic
investment, ensuring India’s emergence as major manufacturing / export
base of telecom equipment and universal availability of basic telecom
services to all villages.
✔ Telecom Regulatory Authority of India (TRAI) - The entry of private
service providers brought with it the inevitable need for independent
regulation. The Telecom Regulatory Authority of India (TRAI) was, thus,
established with effect from 20th February 1997 by an Act of Parliament,
called the Telecom Regulatory Authority of India Act, 1997, to regulate
telecom services, including fixation/revision of tariffs for telecom services
which were earlier vested in the Central Government.
✔ New Telecom Policy 1999 – The most important milestone and
instrument of telecom reforms in India is the New Telecom Policy 1999
(NTP 99). The New Telecom Policy, 1999 (NTP-99) was approved on 26th
March 1999, to become effective from 1st April 1999. Key features of the
NTP 99 include:
○ Private telecom operators licensed on a revenue sharing basis, plus
a one-time entry fee. Resolution of problems of existing operators
envisaged.
○ Department of Telecommunication Services (DTS) corporatized in
2000.
○ Spectrum Management made transparent and more efficient.
✔ National Long Distance - National Long Distance opened for private
participation. The Government announced on 13.08.2000 the guidelines
for entry of private sector in National Long Distance Services without any
restriction on the number of operators.
✔ International Long Distance - In the field of international telephony,
India had agreed under the GATS to review its opening up in 2004.
However, open competition in this sector was allowed with effect from
April 2002 itself. There is now no limit on the number of service providers
in this sector. The licence for ILD service is issued initially for a period of
20 years, with automatic extension of the licence by a period of 5 years.

~7~
✔ Universal Service Obligation Fund - Another major step was to set up
the Universal Service Obligation Fund with effect from April 1, 2002. An
administrator was appointed for this purpose. Subsequently, the Indian
Telegraph (Amendment) Act, 2003 giving statutory status to the Universal
Service Obligation Fund (USOF) was passed by both Houses of Parliament
in December 2003. USFO has initiated action to bring mobile services
within the ambit of Universal Service Obligation Fund (USOF) activities.
✔ Unified Access Services - Unified access license regime was introduced
in November’2003. Unified Access Services operators are free to provide,
within their area of operation, services, which cover collection, carriage,
transmission and delivery of voice and/or non-voice messages over
Licensee’s network by deploying circuit, and/or packet switched
equipment.
✔ Internet Service Providers (ISPs) – Internet service was opened for
private participation in 1998 with a view to encourage growth of Internet
and increase its penetration. Any Indian company with a maximum foreign
equity of 74% is eligible for grant of licence.
✔ Broadband Policy 2004 – Recognizing the potential of ubiquitous
Broadband service in growth of GDP and enhancement in quality of life
through societal applications including tele-education, tele-medicine, e-
governance, entertainment as well as employment generation by way of
high-speed access to information and web based communication;
Government has announced Broadband Policy in October 2004. The main
emphasis is on the creation of infrastructure through various technologies
that can contribute to the growth of broadband services.
✔ Tariff Changes - The Indian Telecom Sector has witnessed major changes
in the tariff structure. The Telecommunication Tariff Order (TTO) 1999,
issued by regulator (TRAI), had begun the process of tariff balancing with a
view to bring them closer to the costs. This supplemented by Calling Party
Pay (CPP), reduction in ADC and the increased competition, has resulted in
a dramatic fall in the tariffs. ADC has been abolished for all calls w.e.f. 1st
October 2008.
✔ Foreign Direct Investment (FDI)
 In Basic, Cellular Mobile, Paging and Value Added Service, and Global
Mobile Personal Communications by Satellite, Composite FDI permitted is
74% (49% under automatic route) subject to grant of license from
Department of Telecommunications subject to security and license

~8~
 conditions. FDI up to 74% (49% under automatic route) is also permitted
for the following: -
○ Radio Paging Service
○ Internet Service Providers (ISP's)
 FDI up to 100% permitted in respect of the following telecom services: -
○ Infrastructure Providers providing dark fibre (IP Category I);
○ Electronic Mail; and
○ Voice Mail
Subject to the conditions that such companies would divest 26% of their equity
in favor of Indian public in 5 years, if these companies were listed in other parts
of the world.
 In telecom manufacturing sector 100% FDI is permitted under
automatic route.
 The Government has modified method of calculation of Direct and
Indirect Foreign Investment in sector with caps and has also
issued guidelines on downstream investment by Indian Companies.
 Guidelines for transfer of ownership or control of Indian companies in
sectors with caps from resident Indian citizens to non-resident entities
have been issued.
✔ Investment Opportunities and Incentives - An attractive trade and
investment policy and lucrative incentives for foreign collaborations have
made India one of the world’s most attractive markets for the telecom
equipment suppliers and service providers.
○ No industrial license required for setting up manufacturing units
for telecom equipment.
○ 100% Foreign Direct Investment (FDI) is allowed through
automatic route for manufacturing of telecom equipments.
○ Payments for royalty, lump sum fee for transfer of technology
and payments for use of trademark/brand name on the
automatic route.
○ Foreign equity of 74% (49 % under automatic route) permitted for
telecom services - basic, cellular mobile, paging, value added
services, NLD, ILD, ISPs - and global mobile personal
communications by satellite.

~9~
 ✔ Network Expansion - The telecom sector has shown robust growth
during the past few years. It has also undergone a substantial change in
terms of mobile versus fixed phones and public versus private
participation. The number of telephones has increased from 54.63
million as on 31.03.2003 to 621.28 million as on 31.03.2010.
Wireless subscribers increased from 13.3 million as on 31.03.2003
to 584.32 million as on 31.03.2010. Whereas, the fixed line
subscribers decreased from 41.33 million in 31.03.2003 to 36.95
million in 31.03.2010. The broadband subscribers grew from a
meager 0.18 million to 8.76 million as on 31.03.2010.
✔ Trend in Tele-density - Tele-density in the country increased from
5.11% in 2003 to 52.74 % in March 2010. In the rural area teledensity
increased from 1.49% in Mar 2003 to 24.31% in March 2010 and in the
urban areas it is increased from 14.32% in Mar 2003 to119.45% in March
2010.This indicates a rising trend of Indian telecom subscribers.
✔ Rural Telephony - Apart from the 200.77million fixed and WLL
connections on March 2010 provided in the rural areas, 570000 uncovered
VPTs have been provided as on March 2010. Thus, 96% of the villages in
India have been covered by the VPTs. More than 3 lakh PCOs are also
providing community access in the rural areas. The target of 80 million
rural connections by 2010 have already met during year 2008 itself. USOF
subsidy support scheme is also being utilized for sharing wireless
infrastructure in rural areas with about 19,000 towers by 2010.
✔ Performance of telecom equipment manufacturing sector - As a
result of Government policy, progress has been achieved in the
manufacturing of telecom equipment in the country. There is a significant
telecom equipment-manufacturing base in the country and there has been
steady growth of the manufacturing sector during the past few years. The
figures for production and export of telecom equipment are
shown in table given below:

(Rs. in crore)

Year Production Export

2002-03 14400 402

2003-04 14000 250

~ 10 ~
 2004-05 16090 400

2005-06 17833 1500

2006-07 23656 1898

2007-08 41270 8131

2008-09 48800 11000

2009-10 50000 (projected @ 13500 (projected

18%) @25%)

Rising demand for a wide range of telecom equipment, particularly in the area of
mobile telecommunication, has provided excellent opportunities to domestic and
foreign investors in the manufacturing sector.
✔ Opportunities - India offers an unprecedented opportunity for telecom
service operators, infrastructure vendors, manufacturers and associated
services companies. A host of factors are contributing to enlarged
opportunities for growth and investment in telecom sector:
○ An expanding Indian economy with increased focus on the
services sector
○ Population mix moving favorably towards a younger age
profile
○ Urbanization with increasing incomes
✔ Research & Development - India has proven its dominance as a
technology solution provider. Efforts are being continuously made to
develop affordable technology for masses, as also comprehensive security
infrastructure for telecom network. Research is on for the preparation of
tested infrastructure for enabling interoperability in Next Generation
Network. It is expected that the telecom equipment R & D shall be doubled
by 2010 from present level of 15%.
✔ 3G & Broadband Wireless Services (BWA) - The government has in a
pioneering decision, decided to auction 3G & BWA spectrum. The broad
policy guidelines for 3G & BWA have already been issued on 1 stAugust
2008 and allotment of spectrum through simultaneously ascending e-
auction process by a specialized agency.

~ 11 ~
 ✔ Mobile Number Portability (MNP) - Mobile Number Portability (MNP)
allows subscribers to retain their existing telephone number when they
switch from one access service provider to another irrespective of mobile
technology or from one technology to another of the same or any other
access service provider.

Targets Set By the Government

1. Network expansion - 800 million connections by the year 2012.
2. Rural telephony - 200 million rural subscribers by 2012, Reduce urban-rural
digital divide from present 25:1 to 5:1 by 2010.
3. Broadband- 20 million broadband connections by 2010, broadband with
minimum speed of 1 mbps, broadband coverage for all Grampanchayats by
the year 2010
4. Manufacturing
○ Making India a hub for telecom manufacturing by facilitating
more and more telecom specific SEZs, quadrupling production in
2010.
○ Achieving exports of 10 billion during 11th Five year plan.
5. International Bandwidth - facilitating availability of adequate international
bandwidth at competitive prices to drive ITES sector at faster growth.
Indian Telecommunications at a glance, (As on 31st March 2010)
Rank in world in network size 3rd

Tele–density (per hundred 52.74

populations)

Telephone connection (In million)

Fixed 36.95

Mobile 548.32

Total 621.28

Village Public Telephones inhabited 5,69,385

(Out of 5,93,601 uncovered villages)

~ 12 ~
 Foreign Direct Investment (in 4070
million) (from April 2000 till March
2010)

Licenses issued

Basic 2

CMTS 38

UAS 241

Infrastructure Provider I 219

ISP (Internet) 371

National Long distance 29

International Long Distance 24

Merger & Acquisitions in Telecom Sector

The number of mergers and acquisitions in Telecom Sector has been increasing
significantly. Telecommunications industry is one of the most profitable and
rapidly developing industries in the world and it is regarded as an indispensable
component of the worldwide utility and services sector. Telecommunication
industry deals with various forms of communication mediums, for example
mobile phones, fixed line phones, as well as Internet and broadband services.
Currently, a slew of mergers and acquisitions in Telecom Sector are going on
throughout the world. The aim behind such mergers is to attain competitive
benefits in the telecommunications industry. The M&A in Telecom Sector are
regarded as horizontal mergers simply because of the reason that the entities
going for merger or acquisition are operating in the same industry that is
telecommunications industry. In the majority of the developed and developing
countries around the world, mergers and acquisitions in the telecommunications
sector have become a necessity. This kind of mergers also assists in creation of
jobs.
Both transnational and domestic telecommunications services providers are
keen to try merger and acquisition options because this will help them in many
ways. They can cut down on their expenses, achieve greater market share and
accomplish market control.
Mergers and acquisitions in the telecommunications sector have been showing a
prosperous trend in the recent past and the economists are advocating that they

~ 13 ~
will continue to do so. The majority of telecommunication services providers
have understood that in order to grow globally, strategic alliances and mergers
and acquisitions are the principal devices. Private sector investment and FDI
(Foreign Direct Investment) have also boosted the growth of mergers and
acquisitions in the telecommunications sector.
Over the last few years, a phenomenal growth has been witnessed in the
number of mergers and acquisitions taking place in the telecommunications
industry. The reasons behind this development include the following:
• Deregulation
• Introduction of sophisticated technologies (Wireless land phone services)
• Innovative products and services (Internet, broadband and cable services)
Economic reforms have spurred the growth in the mergers and acquisitions
industry of the telecommunications sector to a satisfactory level. M&A in
Telecom Sector can also have some negative effects, which include
monopolization of the telecommunication products and services, unemployment
and others. However, the governments of various countries take appropriate
steps to curb these problems.
In countries like India, mergers and acquisitions have increased to a
considerable level from the mid 1990s. In the United States, the mergers and
acquisitions in the telecommunications sector are going on in a full-fledged
manner. The M&A’s in the telecommunications sector are governed or
supervised by the regulatory authority of the telecommunication industry of a
particular country, for instance the Telecom Regulatory Authority of India or
TRAI. The regulatory authorities always keep a tab on the telecommunications
industry so that no monopoly is formed.
Benefits Provided by the Mergers and Acquisitions in the
Telecommunications Sector
○ Building of infrastructure in a more convenient way
○ Licensing options for mergers and acquisitions are often found to be
easier
○ Mergers and acquisitions offer extensive networking advantages
○ Brand value
○ Bigger client base
○ Wide array of products and services

~ 14 ~
4. COMPANY PROFILE
4.1 HISTORY: Hutchison-Essar
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.
Year and Events
➢ 1994 Hutchison Max Telecom Limited (HMTL), a joint venture
between Hutchison and Max, wins the licence to provide cellular
services in Mumbai. C. Sivasankaran sells 51% stake in Delhi’s
Sterlings Cellular to Essar group
➢ 1995 HMTL launches mobile services in India under the Max Touch
brand name
➢ 1996 Swisscom sells 49% stake in Essar Cellphone to Hutchison
➢ 1998 Max’s Analjit Singh sells 41% stake in Hutchison Max to
Hutchison Hong Kong
➢ 2000 (Jan) Hutchison acquires a 49 per cent stake in Sterling
Cellular in the Delhi circle from Swisscom, an Essar Group company.
A few weeks later, the Orange brand name replaces Max Touch in
Mumbai.
➢ 2000 (July) Hutchison and Kotak together acquire a 100 per cent
stake in Usha Martin Telekom in Kolkata circle

~ 15 ~
 ➢ 2000 (Sep) Hutchison acquires a 49 per cent stake in Fascel, which
operates in Gujarat, from Shinawatra
➢ 2001 Hutchison puts in the bid to provide cellular licences in
Chennai, Andhra Pradesh, Karnataka and Maharashtra. It wins all
except Maharashtra
➢ 2003 Essar Teleholdings sells its operations in Rajasthan, Uttar
Pradesh (East) and Haryana toHutchison Essar. Essar was running
these operations through group company, Aircel Diglink India Ltd.
Hutchison acquires licence to provide cellular services in Punjab.
This is bought from Escotel
➢ 2004 Essar picks France Telecom’s 9.9% stake in BPL
Communications. Hutchison Telecommunications International Ltd
(HTIL) gets listed on the Hong Kong and New York stock exchanges.
Launches services in Punjab, West Bengal and Uttar Pradesh (West).
Also receives approval from the regulators to consolidate its
operations in India
➢ 2005 Hutchison Essar consolidates its various mobile companies in
India to create a single entity. A little later, Hutchison Essar signs
agreements with the Essar Group to acquire BPL Communications
and Essar Spacetel. During the same year, Hutch becomes a
national brand. Essar Teleholdings buys Max Telecom Ventures
3.16% stake in Hutchison Essar for Rs. 657 crore. Egyptian cellular
service provider, Orascom, acquires a 19.3 per cent stake in HTIL
➢ 2006 Kotak sells 8.33% stake to Analjit Singh for Rs 1019 crore.
HTIL acquires a 5.11 stake from the Hindujas to increase its direct
and indirect stake in Hutchison-Essar to 67 per cent. Essar holds the
balance 33 per cent. Hutchison-Essar receives the letter of intent
(LoI) from the government to provide cellular services in six more
circles. Hutchison wants to exit
4.2 Vodafone Group plc (LSE: VOD,NASDAQ: VOD) - It is a global
telecommunications company headquartered in Newbury, United Kingdom. It is
the world's largest mobile telecommunications company measured by revenues
and the world's second largest measured by subscribers (behind China Mobile)
with 347 million proportionate subscribers as at 30 June 2010. It operates
networks in 31 countries and has partner networks in a further 44 countries. It
owns 45% of Verizon Wireless, the largest mobile telecommunications company

~ 16 ~
in the United States measured by subscribers. Vodafone was formed in 1984 as
subsidiary of Racial Electronics as a public company. Then known as Racial
Telecommunications Limited, 20% of capital was offered to public in 1988. It
became an independent company in 1991. Changed name to Vodafone group.
Again merged with Airtouch communication. Changed name to Vodafone
Airtouch Plc. Later on revised this name to Vodafone group

The name Vodafone comes from voice data fone, chosen by the company to
"reflect the provision of voice and data services over mobile phones".

Its primary listing is on the London Stock Exchange and it is a constituent of

the FTSE 100 Index. It had a market capitalisation of approximately £80.2 billion
as of August 2010, making it the third largest company on the London Stock
Exchange. It has a secondary listing on NASDAQ.

Revenue ▲ £44.47 billion (2010)

Operating ▲ £9.480 billion (2010)

income

Profit ▲ £8.645 billion (2010)

Total assets ▲ £156.98

billion (2010)

Total equity ▲ £90.38 billion (2010)

Employees 79,000 (March - 2009)

Present Scenario of Vodafone India

It’s turbulent times for Vodafone in India. To occupy top slot, it has to increase
capex and ensure better synergies. Focus on rural push and infrastructure
sharing will hold the key to success. Recently published in Economic Times,
Vodafone India is the rank one in top 20 marketers of 2009.
1. SYNERGIES CLAIMED

~ 17 ~
 ✔ 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 was 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
Reasons for Hutch Sale
There are two main reasons which are responsible for Li Ka-shing to leave India.
They are
➢ Hutch-Essar : Mutual Distrust
➢ A right time to quit Indian operations to finance other operations
Li Ka-Shing was the 10th richest man globally in 2006, is known as a
businessman who spots an opportunity early, invests in it and exits at a
neat premium. It is only after he exits that the rush begins. In the early
1990s, he sold his stake in Star TV to Rupert Murdoch for $825 million.
The Hutch Essar deal has netted him a neat $8.48 billion. What could he
do with that money? Li is a major player in the ports and retail businesses.
Getting access to the ports business in India is difficult, thanks to being
from China. However, with retail being the new mantra in India, Li could be
looking at a third entry. His retail outfits include Watson’s and
PARKnSHOP. While Watsons operates 7,700 stores in 37 countries,
PARKnSHOP is a supermarket chain.

Industry sources say that several incidents revealed the deepening rift
between Hutch and Essar. They say that as telecom valuations in India
started rising, Essar tried to increase its stake in the joint venture.
However, in December 2005, Orascom of Egypt bought a 19.3 per cent
stake in Hutchison Whampoa. This indirectly gave it control of 12.93 per
cent stake in Hutchison Essar. The stake sale decision was reportedly
taken without Essar’s knowledge and strained its relations with Hutchison.
Following this Essar approached the Department of Telecommunications
on this sale saying that Hutchison Whampoa’s equity sale to Orascom may
have an impact on national security as Orascom has a stake in Pakistan’s
Mobilink. Subsequently, say sources, Essar sounded out some private
equity investors about buying out Hutchison’s equity holding in Hutchison
Essar.

~ 18 ~
 What followed was the tussle between Essar and Hutch over BPL’s Mumbai
circle. Sources say that the decision to split the merger of BPL
Communication into Hutchison Essar may also have been prompted by the
potential of the Mumbai circle. (BPL’s mobile operations included BPL
Cellular, which had licences for Maharashtra, Tamil Nadu and Kerala, and
BPL Mobile, which had the licence for Mumbai. BPL Cellular was merged
with Hutchison Essar earlier this year.)

CONTENDERS IN RACE
The key players looking to acquire Hutchison Essar were the Essar Group,
Anil Ambani-owned Reliance Communications, the UK-based Vodafone,
and a string of private equity (PE) players. Malaysia’s Maxis
Communications and Egyptian telco Orascom, which had initially shown
interest, seem to have backed off. Each of these suitors was lured by the
position of Hutch in India.

6. TARGET SELECTION
➢ Hutchinson –Essar was not just the 4th largest player, but also one of the
better-run companies with higher average revenue per subscribers, in
India.
➢ The biggest one is a presence in a market of 143 million subscribers that's
growing at a mind-boggling rate of 5 per cent on a month-on-month basis,
making it the fastest-growing cellular market in the world. What's more,
penetration levels are still low at 12 per cent (less than 2 per cent in rural
India), and as developed telecom markets slide into saturation, India is
clearly the geography where most of the long-term potential is
concentrated.
➢ Fourth largest mobile operator in India with 24.41 million subscribers
➢ 16.41% of the Indian mobile market
➢ Present in 16 of 23 circles. Has license for six others barring Madhya
Pradesh
➢ ARPUs at Rs 374 ($8.31) against national average of Rs 335.46 ($7.45)
➢ Hutch Mumbai ARPU at Rs 609.36 ($13.54), the highest in India, but yet
to be integrated
➢ Accounted for 41 per cent of Hutchison Telecommunication
International’s revenues
➢ Revenues of $908 million (Rs 4,086 crore) in H1 2006 against $1.29
billion (Rs 5,800 crore) in 2005

~ 19 ~
 ➢ Operating profits of Rs 1,017 crore, EBITDA margins at 32.7 per cent in
H1 2006
7. VALUATION
In 1999, when the first telecom deal happened in India, Bharti paid 300 crore for
a 63% stake in JT mobile. That worked out to an acquisition cost of $117 per
subscriber. Predictably, since then, prices have risen. In June 2006, Hutchison
paid $450 million to buy the Hindujas’ 5.11% stake in Hutch Essar. That worked
out to be a valuation of $8.8 billion, or $505 per subscriber. It was much lower
than the $1000 per subscriber that Vodafone paid to buy a 10% stake in Bharti
in October 2005. The latest valuation of Hutch Essar doing the rounds ($21
billion) values each subscriber at $943. While this is lower than what Vodafone
paid for Bharti, it is more than double what Essar paid ($370 per subscriber) to
acquire BPL Communications in August 2005. Globally telecom valuations have
been on the high side. In 2000, Vodafone paid $202 billion for Germany’s
Mannesmann.
Other Factors for Valuation
While there are different things that go into valuing telecom companies, one of
the key figures is Average Revenues per User (ARPU). One reason why Hutch
Essar’s value appeared so high was that it had the highest ARPUs – Rs 374,
against the national average of Rs. 335 and Bharti’s Rs 348.50. This is despite a
19.3 per cent fall in its ARPU since September 2005. But the key advantage was
that during 2006, Hutch added 10.67 million subscribers. That’s an average of
almost a million new subscribers every month. Given that the industry is adding
over 6 million subscribers every month, this figure should only rise. The sharply
rising subscriber base ensures that revenues will keep increasing. While during
2005 (January-December), Hutch Essar had revenues of Rs 5,800 crore, it
notched Rs 4,086 crore in the first half of 2006. The deal with Bharti will also
keep capex costs in check for Vodafone. Considering that chief executive Arun
Sarin was not too keen on 3G services in India immediately, the focus would be
on getting a national coverage.
Finally, valuation must be judged from the perspective of the buyer (sellers
would prefer the highest bidder, everything else being equal). So,
comparatively, Vodafone may be willing to pay more for a significant presence
in the country compared to, say, Reliance, which is already present. Unless, of
course, its market share will give it disproportionate pricing power and it will be
able to drive other cost synergies with its existing businesses.
So, when the $54.8 billion Vodafone bagged Hutchison Essar, it valued the
company at $18.8 billion or $770 per subscriber.
7.1 VALUATION OF HUTCH-ESSAR

~ 20 ~
Value ($ billion)
Hutch Essar 100% enterprise value: 18.8

Hutch Essar debt: 1.33

Equity Value: 17.47

Value of 67% stake: 11.10
Other Debt: 0.63
Net Value: 11.08
Value from Bharti stake sale: 1.62
Net outflow for Vodafone: 9.46
7.2 Interpretation of Valuation
Vodafone seems to have pegged its valuation based on India’s mobile growth
story. After all, there is no other country that is adding over 6 million subscribers
every month. The increasing subscriber base has also meant that while average
revenues per user (ARPU) are falling, revenues are on the rise. The Cellular
Operators’ Association of India (COAI) data clearly shows that though ARPU fell
by 10.66 per cent in the July-September 2006 quarter over the same period last
year, revenues went up by 57.85 per cent. That’s a clear indication of the
potential of the Indian market.
Also, mobile penetration at 13% is well below China’s 41 per cent and Brazil’s 54
per cent. It is expected to touch 40 per cent by 2011-12. By then Vodafone
expects to control 20-25 per cent of the market against 16 per cent now. That
means having a shade over 100 million subscribers. Obviously, revenues will be
higher. The enterprise value per subscriber that Vodafone paid at $770.2 is
much lower than the $1,066 it valued each Bharti subscriber in 2005. Most
importantly, the ARPU of Rs 374 for a Hutch is higher than Bharti’s Rs 349. For
24.41 million subscribers, that works out to annual revenues of $2.4 billion (Rs
10,955 crore).
8. FINANCING THE DEAL
VODAFONE’S successful bid for Hutchison’s 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

~ 21 ~
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 Vodafone’s
advantage, thanks to its access to cash and its capability to strike the least
leveraged deal.
9. PROBLEMS DURING THE PROCESS OF M/A
Hutch was going to be a tough battle ahead as the world’s largest mobile
operator (by revenues) tries to woo the price-conscious Indian consumer.
Vodafone was targeting 100 million Indian subscribers in three years (Hutch has
24.41 million at present). That’s 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 Bharti’s 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, that’s what he has been doing as Hutchison’s
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. That could be a source of problem.
× The Vodafone brand was relatively unknown in the Indian market. Besides
the brand will cost money and take time.

~ 22 ~
 × 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.
× Initial opposition for the Indian partner of HTIL, Essar Ltd.
× Aggressive bidding by competitors.
× Regulators who took their time to approve the deal.
× 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.
But in the end, Vodafone bagged the deal outbidding other competitors. Though
some critics felt that Vodafone had overpaid for Hutchison Essar, Vodafone
contended that the price was worth paying as the deal would help it get a
massive footprint in one of the most competitive telecommunication markets in
the world.
10. POST MERGER INTEGRATION
➢ Vodafone’s alleged tax evasion case is still in the courts. The cellular
operator has been given a $2 billion tax bill by the Supreme Court for not
withholding tax when it acquired 67 percent stake in Hutch for $11 billion
in 2007. Vodafone has challenged the jurisdiction of Indian tax authorities
on the transaction which took place outside the country. Vodafone has
been given a right of appeal to the Indian Courts should the tax authorities
consider they have such jurisdiction
➢ Visitor revenue (when subscribers of other operators roam into its
network) suffered a negative impact due to the Mumbai attack and poor
economic conditions that have reduced travel in the country.
11. EVALUATION OF M/A
➢ Accelerates Vodafone’s move to a controlling position in a leading
operator in the attractive and fast growing Indian mobile market. India
is the world’s 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 licence 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

~ 23 ~
 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 Vodafone’s
innovative products and services to the Indian market, including
Vodafone’s 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 Vodafone’s 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.

12. LESSONS FROM THE CASE

The Vodafone-Hutch deal is one of the largest M&A deal executed by

overseas firm in Indian subcontinent. In today’s volatile market, where major
M&A deals are showing negative growth or companies are looking for
Government bailout money, Vodafone acquisition of hutch is a major
contributor to its revenue. While India’s revenues grew by 29.6 percent other
APAC countries. The Vodafone-hutch acquisition can be described as a
diversifying strategy from the point of view of Vodafone with a fine tune
interest of the company to venture this totally new still a vargin market of
India. Looking upon their vision to grow as a global leader Vodafone wanted
to spread their market to the fast growing economy of Japan and parts of
Asia.

13. CONCLUSION
The deal, the biggest ever in the Indian telecom industry, came after the Indian
government's (GoI) decision in 2006 to raise the limit on foreign direct
investment (FDI) in the telecom sector from 49% to 74%. The deal was expected
to infuse much-needed FDI into the sector to meet the government's targeted
numbers of 500 million customers by 2010. Industry and government circles
welcomed the deal and said that it would give a big boost to the telecom sector.
It would help not just by capital infusion into the sector, but also by bringing in
Vodafone's experience in operating telecom networks.

~ 24 ~
 REFERENCES

1. Mergers & Acquisitions Review, second quarter 2007

2. Vodafone Group Plc, Annual Report on Form 20-F, For the year ended 31 March 2007
3. Asia Calling, The Rise of the Asian Telecommunications Industry, Ernst & Young 2007
4. M&AInsights, Telecoms Sector 2007 by PricewaterhouseCooper
5. www.telegraph.co.uk/news, 09th March 2007
6. http://www.ibnlive.com/business/index.html, 27th April 07
7. India: a Case of Fragile Wireless Service and Technology Adoption? by L-F Pau and
J.Motiwalla, page 25
8. http://www.ft.com/cms/s/75ec718a-906b-11db-a4b9-0000779e2340.html, 20th Dec,
2006
9. In the Middle and Loving it, Businessworld, Issue 15/01/2007
10. Who'll Win Hutch?, Business Today, Issue 28/01/2007
11. What Happens Next?, Businessworld, Issue 26/02/2007
12. The battle for Hutchison Essar, Businessworld 08/01/2007
13. The Gloves are Off, Businessworld, 14/08/2006
14. Dialing into India, Business Today, Issue 11/03/2007
15. The Giant Comes Calliing, Charted Financial Analyst, Issue April 2007

~ 25 ~
~ 26 ~