Abani Merger

8/8/2019 Abani Merger

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1. INTRODUCTION

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspectof corporate strategy, corporate finance and management dealing with thebuying, selling and combining of different companies that can aid, finance, or

help a growing company in a given industry grow rapidly without having tocreate 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 separatecompanies. This rationale is attractive to companies facing competitivepressures. To grab a bigger share of the market and improve profitability,companies will want to become more cost efficient by combining with othercompanies.

1.1MOTIVES BEHIND MERGER & ACQUISTIONS

The dominant rationale used to explain M&A activity is that acquiring firms seekimproved 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 marketingand 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.

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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: similarportfolio invested by two different mutual funds (Ahsan Raza Khan, 2009)

namely united money market fund and united growth and income fund, caused

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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

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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 wholeof 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 from26 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 thecorresponding 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 with28, 27 and 5 number of deals respectively.

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

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Mergers & Acquisition Deals in India for first financialquarter 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 Industrydeals involving Indian companies. According to figures releasedby ASSOCHAM, Mergers &Acquisition deals valued at USD 33.83 billion wereexecuted during just the first quarter of financial year 2010, a growth of about257% over corresponding quarter last year, which registered deals worth USD9.49 billion (April June 2009). TheTelecom Industry took the largest pie of M&Aactivity, accounting for deals worth USD 22.73 billion, which represented 67.19per cent share in the total valuation of the M & A deals. The other sectors likepharmaceutical, 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.

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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 marketaccess 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 wereopened gradually to the private sector.

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National Telecom Policy1994 -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 Indias competitiveness in global

market and promoting exports, attractive FDI and stimulating domestic

investment, ensuring Indias emergence as major manufacturing / exportbase 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 isthe 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 providersin this sector. The licence for ILD service is issued initially for a period of

20 years, with automatic extension ofthe licence by a period of 5 years.

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Universal Service Obligation Fund - Another major step was to set upthe 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 Parliamentin 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 introducedin November2003. 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

Licensees 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 Internetand 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 GlobalMobile 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

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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 worlds 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 fortelecom services - basic, cellular mobile, paging, value added

services, NLD, ILD, ISPs - and global mobile personal

communications by satellite.

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Network Expansion - The telecom sector has shown robust growthduring 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 from5.11% 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 WLLconnections 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 aresult of Government policy, progress has been achieved in themanufacturing 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

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2004-05 16090 400

2005-06 17833 1500

2006-07 23656 1898

2007-08 41270 8131

2008-09 48800 11000

2009-10 50000 (projected @

18%)

13500 (projected

@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 atechnology 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 apioneering decision, decided to auction 3G & BWA spectrum. The broad

policy guidelines for 3G & BWA have already been issued on 1stAugust

2008 and allotment of spectrum through simultaneously ascending e-auction process by a specialized agency.

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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 31stMarch 2010)

Rank in world in network size 3rd

Teledensity (per hundredpopulations)

52.74

Telephone connection (In million)

Fixed 36.95

Mobile 548.32

Total 621.28

Village Public Telephones inhabited(Out of 5,93,601 uncovered villages)

5,69,385

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Foreign Direct Investment (inmillion) (from April 2000 till March2010)

4070

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 increasingsignificantly. Telecommunications industry is one of the most profitable andrapidly developing industries in the world and it is regarded as an indispensablecomponent of the worldwide utility and services sector. Telecommunicationindustry deals with various forms of communication mediums, for examplemobile 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 competitivebenefits in the telecommunications industry. The M&A in Telecom Sector areregarded as horizontal mergers simply because of the reason that the entitiesgoing for merger or acquisition are operating in the same industry that istelecommunications industry. In the majority of the developed and developingcountries around the world, mergers and acquisitions in the telecommunicationssector have become a necessity. This kind of mergers also assists in creation ofjobs.

Both transnational and domestic telecommunications services providers arekeen 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 andaccomplish market control.

Mergers and acquisitions in the telecommunications sector have been showing aprosperous trend in the recent past and the economists are advocating that they

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will continue to do so. The majority of telecommunication services providershave understood that in order to grow globally, strategic alliances and mergersand acquisitions are the principal devices. Private sector investment and FDI(Foreign Direct Investment) have also boosted the growth of mergers andacquisitions in the telecommunications sector.

Over the last few years, a phenomenal growth has been witnessed in thenumber of mergers and acquisitions taking place in the telecommunicationsindustry. 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 acquisitionsindustry 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, unemploymentand others. However, the governments of various countries take appropriatesteps to curb these problems.

In countries like India, mergers and acquisitions have increased to aconsiderable level from the mid 1990s. In the United States, the mergers andacquisitions in the telecommunications sector are going on in a full-fledgedmanner. The M&As in the telecommunications sector are governed orsupervised by the regulatory authority of the telecommunication industry of aparticular country, for instance the Telecom Regulatory Authority of India orTRAI. The regulatory authorities always keep a tab on the telecommunicationsindustry so that no monopoly is formed.

Benefits Provided by the Mergers and Acquisitions in theTelecommunications 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

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4. COMPANY PROFILE

4.1 HISTORY: Hutchison-Essar

Hutch Essar is a leading Indian telecommunications mobile operator with23.3 million customers at 31 December 2006, representing a 16.4% nationalmarket share. Hutch Essar operates in 16 circles and has licences in anadditional six circles. In the year to 31 December 2005, Hutch Essar reportedrevenue of US$1,282 million, EBITDA of US$415 million, and operating profitof US$313 million. In the six months to 30 June 2006, Hutch Essar reportedrevenue 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 Essaracquired BPL, thereby adding three circles, each operating with 900 MHzspectrum. In October 2006, Hutch Essar acquired Spacetel, adding sixfurther 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 Delhis

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 Maxs 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 centstake in Usha Martin Telekom in Kolkata circle

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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 Telecoms 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 itsoperations 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% ofVerizon Wireless, the largest mobile telecommunications company

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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

income

9.480 billion (2010)

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

Its turbulent times for Vodafone in India. To occupy top slot, it has to increasecapex and ensure better synergies. Focus on rural push and infrastructuresharing 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

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Vodafone gets access to the fastest growing mobile phone market in theworld that is expected to touch 500 million subscribers by 2010.

Cellular penetration in rural India is below 2%, but 67% of Indiaspopulation 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 abusinessman who spots an opportunity early, invests in it and exits at aneat premium. It is only after he exits that the rush begins. In the early1990s, 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 hedo 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 beingfrom China. However, with retail being the new mantra in India, Li could belooking at a third entry. His retail outfits include Watsons andPARKnSHOP. While Watsons operates 7,700 stores in 37 countries,PARKnSHOP is a supermarket chain.

Industry sources say that several incidents revealed the deepening riftbetween Hutch and Essar. They say that as telecom valuations in Indiastarted rising, Essar tried to increase its stake in the joint venture.However, in December 2005, Orascom of Egypt bought a 19.3 per centstake in Hutchison Whampoa. This indirectly gave it control of 12.93 percent stake in Hutchison Essar. The stake sale decision was reportedlytaken without Essars knowledge and strained its relations with Hutchison.Following this Essar approached the Department of Telecommunicationson this sale saying that Hutchison Whampoas equity sale to Orascom mayhave an impact on national security as Orascom has a stake in Pakistans

Mobilink. Subsequently, say sources, Essar sounded out some privateequity investors about buying out Hutchisons equity holding in HutchisonEssar.

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What followed was the tussle between Essar and Hutch over BPLs Mumbaicircle. Sources say that the decision to split the merger of BPLCommunication into Hutchison Essar may also have been prompted by thepotential of the Mumbai circle. (BPLs mobile operations included BPL

Cellular, which had licences for Maharashtra, Tamil Nadu and Kerala, andBPL Mobile, which had the licence for Mumbai. BPL Cellular was mergedwith 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. Malaysias MaxisCommunications and Egyptian telco Orascom, which had initially showninterest, 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 thebetter-run companies with higher average revenue per subscribers, inIndia.

The biggest one is a presence in a market of 143 million subscribers that'sgrowing 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 ruralIndia), and as developed telecom markets slide into saturation, India isclearly the geography where most of the long-term potential isconcentrated.

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

Internationals revenues Revenues of $908 million (Rs 4,086 crore) in H1 2006 against $1.29

billion (Rs 5,800 crore) in 2005

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Operating profits of Rs 1,017 crore, EBITDA margins at 32.7 per cent inH1 2006

7. VALUATION

In 1999, when the first telecom deal happened in India, Bharti paid 300 crore fora 63% stake in JT mobile. That worked out to an acquisition cost of $117 persubscriber. Predictably, since then, prices have risen. In June 2006, Hutchisonpaid $450 million to buy the Hindujas 5.11% stake in Hutch Essar. That workedout to be a valuation of $8.8 billion, or $505 per subscriber. It was much lowerthan the $1000 per subscriber that Vodafone paid to buy a 10% stake in Bhartiin October 2005. The latest valuation of Hutch Essar doing the rounds ($21billion) values each subscriber at $943. While this is lower than what Vodafonepaid for Bharti, it is more than double what Essar paid ($370 per subscriber) toacquire BPL Communications in August 2005. Globally telecom valuations havebeen on the high side. In 2000, Vodafone paid $202 billion for GermanysMannesmann.

Other Factors for ValuationWhile there are different things that go into valuing telecom companies, one ofthe key figures is Average Revenues per User (ARPU). One reason why HutchEssars value appeared so high was that it had the highest ARPUs Rs 374,against the national average of Rs. 335 and Bhartis Rs 348.50. This is despite a19.3 per cent fall in its ARPU since September 2005. But the key advantage wasthat during 2006, Hutch added 10.67 million subscribers. Thats an average ofalmost a million new subscribers every month. Given that the industry is addingover 6 million subscribers every month, this figure should only rise. The sharplyrising subscriber base ensures that revenues will keep increasing. While during2005 (January-December), Hutch Essar had revenues of Rs 5,800 crore, itnotched Rs 4,086 crore in the first half of 2006. The deal with Bharti will alsokeep capex costs in check for Vodafone. Considering that chief executive ArunSarin was not too keen on 3G services in India immediately, the focus would beon getting a national coverage.

Finally, valuation must be judged from the perspective of the buyer (sellerswould prefer the highest bidder, everything else being equal). So,comparatively, Vodafone may be willing to pay more for a significant presencein the country compared to, say, Reliance, which is already present. Unless, ofcourse, its market share will give it disproportionate pricing power and it will beable to drive other cost synergies with its existing businesses.

So, when the $54.8 billion Vodafone bagged Hutchison Essar, it valued thecompany at $18.8 billion or $770 per subscriber.

7.1 VALUATION OF HUTCH-ESSAR

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Value ($ billion)

Hutch Essar 100% enterprise value: 18.8

Hutch Essar debt: 1.33

Equity Value: 17.47Value 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 Indias mobile growthstory. After all, there is no other country that is adding over 6 million subscribersevery month. The increasing subscriber base has also meant that while averagerevenues per user (ARPU) are falling, revenues are on the rise. The CellularOperators Association of India (COAI) data clearly shows that though ARPU fellby 10.66 per cent in the July-September 2006 quarter over the same period lastyear, revenues went up by 57.85 per cent. Thats a clear indication of thepotential of the Indian market.Also, mobile penetration at 13% is well below Chinas 41 per cent and Brazils 54per cent. It is expected to touch 40 per cent by 2011-12. By then Vodafoneexpects to control 20-25 per cent of the market against 16 per cent now. Thatmeans having a shade over 100 million subscribers. Obviously, revenues will behigher. The enterprise value per subscriber that Vodafone paid at $770.2 ismuch lower than the $1,066 it valued each Bharti subscriber in 2005. Mostimportantly, the ARPU of Rs 374 for a Hutch is higher than Bhartis Rs 349. For24.41 million subscribers, that works out to annual revenues of $2.4 billion (Rs10,955 crore).

8. FINANCING THE DEAL

VODAFONES successful bid for Hutchisons 67 per cent stake in Hutch Essarmay have been driven by its compulsions to enter the high-growth Indianmarket, but what clinched the deal for the UK-based company was theenormous booty of cash at its disposal. Analysts estimate that Vodafone wasprobably 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 $15billion last year (the remaining $10 billion is expected to go back toshareholders). It will also get $1.62 billion cash from its 5.6 per cent stake sale

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in Bharti. This $6.62 billion may go towards funding the $11.1-billion price tagfor the 67 per cent stake. In addition, Vodafone has free cash reserves (for thefirst six months of 2006) in excess of $3 billion. It has also sold its 25 per centstake in Swisscom Mobile and exited Belgium. Therefore, the debt component inthe deal is likely to be low, according to an analyst. Unconfirmed sources say

that Reliance Communications was wary of raising too much debt, which mayhave acted as a deterrent. Whether the UK-based telco overpaid is anotherquestion. Investment bankers in India, too, have underlined Vodafonesadvantage, thanks to its access to cash and its capability to strike the leastleveraged deal.

9. PROBLEMS DURING THE PROCESS OF M/A

Hutch was going to be a tough battle ahead as the worlds largest mobileoperator (by revenues) tries to woo the price-conscious Indian consumer.Vodafone was targeting 100 million Indian subscribers in three years (Hutch has24.41 million at present). Thats half its current subscriber base across 27

countries. But getting there means adding between 1.5 million and 2 millionsubscribers every month. While Hutch has been adding around 1 millionsubscribers a month, market leader Bharti has been adding 1.75 million.Vodafone needs to exceed Bhartis net subscriber additions to be the leader inthree years. Second, it needs to tap rural India in a big way. Vodafone hasearmarked an investment of $2 billion over the next couple of years tostrengthen its presence here. The agreement with Bharti fits in perfectly to tapthe hinterland.

Realising the importance of familiarity with the terrain, Sarin has opted to retainAsim Ghosh as the man to head the venture. Once the board approves it, Ghosh

will formally take charge. After all, thats what he has been doing as Hutchisonskey 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 theventure, 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 iflitigation is launched.

Summing these challenges we have

The cellular telephony is extremely competitive, and India has one of thelowest 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.

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Telecom valuations are at a high and this could mean it is years Vodafonerecovers its multi-billion dollar investment.

Its big competitors are home-grown majors, who can manage theenvironment 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 thelimits of FDI allowed as both the players would be operating in the samecircles.

But in the end, Vodafone bagged the deal outbidding other competitors. Thoughsome critics felt that Vodafone had overpaid for Hutchison Essar, Vodafonecontended that the price was worth paying as the deal would help it get amassive footprint in one of the most competitive telecommunication markets inthe world.

10. POST MERGER INTEGRATION

Vodafones alleged tax evasion case is still in the courts. The cellularoperator has been given a $2 billion tax bill by the Supreme Court for notwithholding tax when it acquired 67 percent stake in Hutch for $11 billionin 2007. Vodafone has challenged the jurisdiction of Indian tax authoritieson the transaction which took place outside the country. Vodafone hasbeen given a right of appeal to the Indian Courts should the tax authoritiesconsider they have such jurisdiction

Visitor revenue (when subscribers of other operators roam into itsnetwork) suffered a negative impact due to the Mumbai attack and pooreconomic conditions that have reduced travel in the country.

11. EVALUATION OF M/A

Accelerates Vodafones move to a controlling position in a leadingoperator in the attractive and fast growing Indian mobile market. Indiais the worlds 2nd most populated country with over 1.1 billioninhabitants. India is the fastest growing major mobile market in theworld, with around 6.5 million monthly net adds in the last quarterIndia benefits from strong economic fundamentals with expected realGDP 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, equivalentto a 16.4% nationwide market share. year-on-year revenue growth of

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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 networkinvestment 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 Vodafonesinnovative products and services to the Indian market, includingVodafones focus on total communication solutions for customers.Vodafone and Hutch Essar both expected to benefit from increasedpurchasing power and the sharing of best practices.

Increases Vodafones presence in higher growth emerging markets.Proportion of Group statutory EBITDA from the EMAPA region expectedto 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 todays 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 Indias 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.

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REFERENCES

1. Mergers & Acquisitions Review, second quarter 20072. 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 20074. M&AInsights, Telecoms Sector 2007 by PricewaterhouseCooper5. www.telegraph.co.uk/news, 09th March 20076. http://www.ibnlive.com/business/index.html, 27th April 077. India: a Case of Fragile Wireless Service and Technology Adoption? by L-F Pau and

J.Motiwalla, page 258. http://www.ft.com/cms/s/75ec718a-906b-11db-a4b9-0000779e2340.html, 20th Dec,

20069. In the Middle and Loving it, Businessworld, Issue 15/01/200710. Who'll Win Hutch?, Business Today, Issue 28/01/200711. What Happens Next?, Businessworld, Issue 26/02/2007

12. The battle for Hutchison Essar, Businessworld 08/01/200713. The Gloves are Off, Businessworld, 14/08/200614. Dialing into India, Business Today, Issue 11/03/200715. The Giant Comes Calliing, Charted Financial Analyst, Issue April 2007

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Abani Merger