Vodafone's Passage to India

Deepening its position in the white-hot India mobile market, Vodafone bags India's Hutchison Essar for $11.1 billion

Since taking over as chief executive of the British Vodafone Group (VOD) in 2003, Arun Sarin has tried to refocus the giant mobile wireless operator toward emerging markets, where industry revenues are expected to grow at annualized rates of about 12% vs. just one-third of that pace in handset-saturated Europe. That's why over the past couple of years, the India-born Sarin has done deals in Turkey, South Africa, and Romania.

Now Sarin has made a major strategic move that will more fully realize this shift in focus. In a game-changing deal for Vodafone, the company announced on Feb. 11 that it will pay $11.1 billion in cash for a controlling 67% stake in Hutchison Essar, India's fourth-biggest mobile-phone company.

A Major Prize

For Vodafone, which will also assume about $2 billion in debt in a deal that values Hutchison Essar at about $18.8 billion, prevailing in the corporate auction for the company is quite a coup. "The announcement is clear evidence of how we are executing our strategy of developing our presence in emerging markets," Sarin said in a statement announcing the deal.

Hutchison Essar is a joint venture between Indian conglomerate Essar and Hutchison Telecom International (HTX), one of the companies that form the global business sprawl of Hutchison Whampoa, which has interests from ports to Internet broadband and is controlled by Hong Kong billionaire investor Li Ka-shing.

Vodafone triumphed over another team of investors led by India's Reliance Communications, the second-biggest wireless operator domestically, whose bid was backed by private equity heavyweights Blackstone, Carlyle, and Texas Pacific. Others in the running were the Hinduja Group of India and Essar Group itself.

Essar, which owns 33% and had the first right of refusal for the stake, appears to have accepted Vodaphone as the new partner. "We are delighted that Hutchison and Essar have together created this value," said an Essar release.

No. 1 Growth Market

Vodafone will be picking up Hutchison Essar's 23.3 million customers and a 16.4% chunk of the white-hot Indian mobile-phone market. The Indian joint venture has been enjoying robust growth. In the six-month period ended June 30, Hutchison Essar's revenue grew by 51% and profits clocked about 33% growth.

India is also the fastest-growing market on the planet right now. "India is destined to become one of the largest and most important mobile markets in the world," Vodafone Chairman Sir John Bond said in a statement.

Indeed, India outstripped growth in China for the first time last year—and is on pace to become more than three times as fast in 2007, according to a new study by London-based research firm Wireless Intelligence (see BusinessWeek.com, 1/30/07, "Mobile Elite Rush to Answer India's Call").

This is a startling development given that India was pretty much a telecom backwater at the start of the decade. Last year, the number of mobile connections in India more than doubled, to 142.2 million, and that figure is expected to increase 48%, to roughly 211 million, by the end of 2007.

Backing Out of Bharti

China is still the world's biggest mobile-phone market with an estimated 443 million subscribers, according to Wireless Intelligence. However, the mainland's market grew by only 18% last year and that pace will slow further in 2007, to about 14%—still robust compared to developed markets such as the U.S., Western Europe, and Japan.

Back in 2005, Vodafone acquired a 10% stake in Bharti Airtel, India's largest telecom player with 35.51 million customers. But the British giant didn't stand a chance of taking majority control because Bharti's main shareholders weren't interested in selling.

In its announcement about Hutchison Essar, Vodafone disclosed that it has granted Bharti the option to buy back 5.6% of that stake for $1.6 billion. If the option is not exercised, Vodafone will sell to another party but plans to retain a 4.4% position in Bharti.

Ka-shing In…Again

One clear winner is Hong Kong's fabled dealmaker Li. He will walk off with billions after the sale and cement his dealmaking credentials as a guy with an uncanny sense of knowing when to cash in his chips (see BusinessWeek.com, 12/27/06, "Is Li Ka-shing Making His Move in India?").

In 1999, he pocketed nearly $20 billion in profits when Hutchison sold British cellular carrier Orange to Mannesmann at the height of the tech boom. Later that year Hutchison got $5.9 billion for its share of U.S. cellular carrier VoiceStream Wireless—which it had bought for just $1.3 billion.

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