Only Two can Tango
It takes two to tango and three to make a race. Clearly, the fight for Hutch is between Reliance and Vodafone and the chieftains of both companies have already started lobbying with the government and the other stakeholders to get a piece of the pie. If Essar decides to compete with either of the two, then this horse race might take an ugly turn, as the Hutch deal is an important business milestone for both Reliance and Vodafone while for Essar, it's purely a money spinning wheel that can make lot of difference to Essar's fortunes.

The deal will be a tough one, but would strengthen the hand of Vodafone's under-pressure chief executive Arun Sarin if he manages Vodafaone's successful move into India, and would lay to rest all questions about the group's future growth.

Make no Mistake
Vodafone would be a bigger loser if it fails to acquire Hutch, though the deal is equally critical for Reliance. Reliance apparently fully recognizes this and is desperately waiting to outbid Vodafone's offer.

Buying Hutch would establish a major Vodafone brand in India. Vodafone would have compounded its error if it had not actively continued to explore its options in the Indian market. However, it will require a far greater understanding of the Indian market than the company's advisers on the Hutch's deal possessed. Though valuation metrics in Hutch are not completely broken down but with some huge anomalies, Vodafone can uniquely capitalize on it.

Arun Sarin, though keeping a low profile, has kept all doors open to snatch the deal from its rivals. He is even ready to partner with Essar to own majority stake in the deal.

"Essar is a natural partner. It is already there in the joint venture. We are talking to several companies. We will see who we can have as partner on a long-term basis," Vodafone CEO Arun Sarin had told reporters at the close of his two-day visit to India.

Vodafone's bid has advantages over an offer of roughly the same amount by Reliance, because there would be less regulatory risk involved and much of Hutch's management and work force would remain intact.

But CLSA Asia Pacific Markets, in its research dated January 2, 2007, said Vodafone seems to be offering a large premium for Hutchison Essar, but the business is growing at 30% per year. When Vodafone bought a 10% stake in Bharti for Rs 351/share, 7.4% premium to Bharti's market price at that time, Singtel believed that the valuation was too high, but really missed out as Bharti's share price has gone more than 60% since then.

If Vodafone prevails in the bidding, it will have to sell its 10% stake in Bharti Airtel. But Vodafone has not yet reached an agreement with Bharti to sell its stake.

The main sticking point with Reliance is committing itself to taking whatever steps are needed to win regulatory approval. Anil Ambani has already had an initial round of discussions with the Union Minister of Communications, Dayanidhi Maran. As per regulatory directives, unlike Vodafone, which is a foreign operator, domestic buyers will have to buy 100% of Hutch or 10% of it. This has become a major stumbling block for Reliance. According to sources, it is now trying to push the government to relax regulatory norms so that a level playing field can be created, which essentially means Reliance's Hutch. Anil Ambani has already roped-in a string of bankers including Blackstone.

Anil Ambani's ambition to be successful in the GSM arena can only happen if he manages to get hold of this deal where Reliance will get 16 circles and 22 mn customers on a platter. Not only this, Reliance would get the status of one of the biggest telecom operators in the world.

Both parties are still evaluating the deal, and the formal process is yet to start. It would be interesting to see what shape this intense battle takes eventually.

Troubleshooters
The auction of Hutch, with its 22 mn customers across the country, comes at a time of intense competition for the wireless phone industry, which has been engaged in heavy price wars and marketing campaigns. The battle is over billions of dollars of annual revenues. And, the business is expected to grow still more lucrative over the next five years as wireless providers are set to roll out next generation networks. In addition, the Indian market is considered less saturated than many markets in Europe and Asia, offering strong growth potential.

Acquisition of Hutch by an Indian operator will initiate a round of consolidation for the industry, where a few regional operators are acquired by the biggies. This could lead to lesser competition, especially if two major operators merge. Hutchison Essar's buyout would make Reliance, currently the second largest mobile operator by subscriber numbers, the undisputed leader with 50 mn subscribers (against Bharti's 30 mn).

An acquisition by Vodafone will intensify competition benefiting the consumer. With 3G set to be rolled-out in 2007, entry of a foreign player will significantly alter competitive dynamics of the industry, bringing in new and improved offerings for consumers as well as increased focus on service quality.

Troubles exacerbated the struggles of Hutch, one of the industry's strongest brand names. Over the last year, it has had technical and operational problems, though company executives maintained that the problems were isolated cases and not caused by systemic problems. Executives also said the recent lapses were not the reason Hutch was put up for sale. Rather, they said, because of changing dynamics in the market, the time seemed right to gain an optimum price.

"The ongoing dispute with the Essar group, Indian government's equivocal stance on Orascom's 13% beneficial stake in Hutchison Essar, coupled with high valuations in the Indian telecom industry is driving its sale of 67% stake in the JV. The Indian telecom industry has been witnessing robust growth (overtaking China for the first time in 2006 in terms of monthly subscriber additions), with valuations soaring high, almost to unrealistic levels. This is probably the right time for Hutchison Whampoa to cash out and invest in other businesses," says Sameer Walia, MD, The Smart Cube.

Operator's Outlook
Mobile phone penetration in India is very low (one in eight people have a mobile phone). Hutchison Essar has historically enjoyed higher ARPU than other Indian operators and is viewed as a high-end urban operator. Also, the post-paid to prepaid ratio for Hutch is much higher than that of other operators-a very attractive proposition for any buyer.

Indian operators such as Reliance Communication will gain from Hutch's premium brand/image in the market, strong network and a dominant market position as a result of the acquisition. Reliance, primarily a CDMA operator and the second largest cellular operator in the country, has been looking to enhance its operations in the GSM space and Hutchison Essar fits in very well with this strategy.

Of course, at the end of the day 'value' is a straight function of the price one pays for the asset!

"I see this as a two-horse race between Vodafone and Reliance. Other investors are likely to drop out due to high valuations offered by these two operators. Plus, you need clout with the Indian government to pull this deal through," adds Walia.

But any deal of this scale can happen only after due diligence, and all the concerned stakeholders are still assessing the situation, only then the final bid would be made. But, whoever manages to get it, would undoubtedly be the Lord of the Telecom Ring.

Rahul Gupta
rahulg@cybermedia.co.in