Feb. 12 (Bloomberg) -- Vodafone Group Plc will buy control of Hutchison Essar Ltd., India's fourth-largest mobile-phone company, for $11.1 billion to gain its first network in the world's fastest-growing wireless market.

Vodafone, the world's largest wireless carrier, won an auction for a 67 percent stake from Hong Kong billionaire Li Ka- shing's Hutchison Telecommunications International Ltd., Vodafone Chief Executive Officer Arun Sarin said yesterday. The Newbury, England-based company will offer to buy the remaining 33 percent from Mumbai-based Essar Group, he said.

Vodafone beat Reliance Communications Ltd. and Hinduja Group in the bidding for Hutchison Essar in the company's biggest deal since Sarin became CEO in July 2003. The expansion in India, where mobile-phone companies are adding about 6 million users a month, will help counter slowing growth in Western Europe.

``We all know India is a fast-growing market. What I need to know is how Vodafone plans to keep on growing to make the deal worthwhile,'' said Philippe Kiewiet de Jonge, who manages about $150 million, including Vodafone stock, at Amsterdam-based ABN Amro Asset Management. ``The deal makes strategic sense, but whether it will be a success will depend on what they tell me on the numbers behind the transaction.''

Shares of Vodafone rose as much as 3.25 pence, or 2.2 percent, to 152.50 pence in London. The stock gained 13 percent last year.

Trading in Hutchison Telecom shares was suspended in Hong Kong today, ``pending the release of an announcement regarding a very substantial disposal,'' the company said in a statement to the Hong Kong Stock Exchange.

Goldman Sachs Group Inc. is advising Hutchison Telecom, and UBS AG is advising Vodafone.

Essar's Stake

Vodafone will directly own a 52 percent stake in Hutchison Essar, and have operational control of the company. Local partners will hold 15 percent on its behalf to meet Indian regulatory rules, the company said. Foreign companies can own up to 74 percent of telecom service providers.

The deal values Hutchison Essar at $18.8 billion, including debt, Vodafone said. The company, which will assume debt of about $2 billion as part of the transaction, said it will offer to buy Mumbai-based Essar's stake at the same price per share being paid to Hutchison Telecom.

Minority partners Asim Ghosh, managing director of Hutchison Essar, holds 6.25 percent of Hutchison Essar, and businessman Analjit Singh, who originally controlled the company then known as Hutchison Max, owns 8.75 percent.

Rising Debt

The acquisition will add to Vodafone's earnings five years after the deal is completed, Sarin said.

Vodafone said its net debt will rise to between 22.8 billion pounds ($45 billion) and 23.3 billion pounds at the end of March, compared with 20.3 billion pounds at the end of September.

Credit-default swaps contracts based on Vodafone debt are little changed since the company said it might bid for the Hutchison Essar stake.

Contracts based on 10 million euros of Vodafone debt rose 1,000 euros to 26,000 euros, according to Deutsche Bank AG. Credit-default swaps are based on corporate bonds and are used to speculate on a company's ability to repay debt. An increase indicates deteriorating perceptions of credit quality.

The price compares with 25,500 euros on Dec. 21, the day before Vodafone said it may bid.

Bharti Partnership

Vodafone is already involved in India through its 10 percent of Bharti Airtel Ltd., the country's largest mobile- phone operator. Vodafone said it gave Bharti an option to buy back a 5.6 percent stake for $1.6 billion and will retain the remaining 4.4 percent stake.

Bharti today said the two companies will share infrastructure such as telecommunication towers, allowing them to expand their network into India's rural areas. Vodafone will also give 50 percent of its inbound roaming traffic to Bharti for three years, the Indian operator said in a statement.

India has ``huge potential for growth'' because only 13 percent of the population have mobile phones, Sarin said.

Vodafone said about 40 percent of the population has wireless coverage access. Sarin said the company's priority is ``building and getting into'' rural areas in India.

Vodafone sold a 21 percent stake in Indian operator RPG Cellular Services Ltd. in June 2003, a month before Sarin took over as CEO. Aircel Ltd., the biggest mobile-phone operator in India's southern province of Tamil Nadu owned by Malaysia's Maxis Communications Bhd., bought RPG in the same year.

Emerging Markets

Hutchison Essar, which began operations in 1994 with a mobile license for India's commercial hub of Mumbai, ended December with 23.3 million subscribers and a nationwide market share of almost 16 percent. Its users account for a fifth of wireless connections in New Delhi and a quarter in Mumbai, two of India's largest markets.

Vodafone's purchase, which will close in the second quarter, is part of the company's strategy to boost growth by expanding in emerging markets and reducing or selling stakes in mature ones.

Sarin's strategy differs from that of his predecessor, Christopher Gent, who spent $300 billion expanding through acquisitions over about six years, including the $188 billion purchase of Germany's Mannesmann AG in 2000.

`Repositioned'

Last year Vodafone sold its Japanese mobile unit for 1.8 trillion yen ($12 billion) to Softbank Corp. In January 2006, it sold its Swedish mobile-phone unit for 1.04 billion euros ($1.4 billion). Last year Vodafone also sold its 25 percent stake in Swisscom AG's mobile unit and a 25 percent stake in Proximus, a Belgian wireless company.

In May, Vodafone bought Telsim Mobil Telekomunikasyon Hizmetleri AS in Turkey for $4.55 billion. The company also has stakes in South Africa and Egypt.

The Hutchison Essar deal ``is clear evidence of our strategy especially in developing our emerging-market businesses,'' Sarin told reporters yesterday. ``We really repositioned the company in a fantastic way.''

The price Vodafone is paying equals about $916 for each Hutchison Essar customer, based on the December client figure and Vodafone's 52 percent stake. That compares with about $500 per customer in the Telsim acquisition last year.

Partnership

Hutchison Telecom had set a Feb. 9 deadline for bids, and asked Reliance, India's second-largest mobile-phone company, and a planned tie-up between India's Hinduja Group and Qatar Telecom QSC to submit offers, according to three people with direct knowledge of the process.

If Essar Group doesn't accept Vodafone's offer, Vodafone said it will welcome the company as a partner. Sarin said Essar doesn't have a right of first refusal. ``That's our view, that's our lawyers' view, that's HTIL's view,'' Sarin told reporters.

Vodafone forecasts that it will have 20 percent to 25 percent market share in India by 2012. The company said it will increase its capital investment, primarily in the first two to three years. In that time capital expenditures as a percentage of revenue will drop to ``the low teens'' by fiscal 2012, Vodafone said.

To contact the reporters on this story: Alex Armitage in Barcelona at aarmitage@bloomberg.net; Chitra Somayaji in Bangalore at csomayaji@bloomberg.net.

Last Updated: February 12, 2007 05:01 EST