Hutch-Essar MD Asim Ghosh: Wants an IPO

Essar Chairman Shashi Ruia: Wants to consolidate

Is all well between Hutchison and Essar? That's a question that has been doing the rounds for a couple of weeks now. If the buzz in Mumbai's investment banking circles is anything to go by, things are not hunky-dory between the two partners that make up Hutchison Essar, the mobile telephony joint venture (JV) that operates in 16 circles in India. Hutchison Telecommunication International Ltd (HTIL) directly holds a 42.34 per cent stake in the JV, and 19.5 per cent indirectly (see Who's The Boss?). The Ruias of the Essar group control 33.05 per cent, and could be in the hunt for 5.11 per cent more, currently held by the Hindujas. Even if Essar does move up to 38.2 per cent, Hutchison clearly calls the shots, being the largest shareholder on the basis of its direct holding; the indirect holding comfortably takes the Hong Kong telecom firm beyond 51 per cent, ensuring management control.

So, where lies the rub? If one section of observers is to be believed, the Ruias have sensed a lucrative opportunity in telecom, and are keen to control India's third largest cellular service provider (after Bharti and Reliance). Hutchison on the other hand feels that, given the high valuations in the telecom space, the time is ripe for an initial public offering (IPO), which will help unlock the value in the JV, and provide the much-needed capital for future growth-investment bankers estimate Hutch-Essar's valuation at Rs 45,000 crore, and even a 10 per cent equity dilution will help the company raise Rs 4,500 crore. However, the IPO which has been in the works for over a year now, is in limbo.

Hints of a scrap between the two partners became evident when recently Essar wrote to the Department of Telecommunications (DOT), asking for clarity on indirect holding structures. For Hutchison, this came as a bolt from the blue. This issue pertained to Egyptian telecom major Orascom's decision to acquire a 19.3 per cent stake in HTIL, which holds Hutchison's stake in the joint venture. That deal gives Orascom a beneficial stake of 9.57 per cent in Hutchison Essar, which Essar apparently hasn't taken to very kindly. DOT apparently isn't too concerned about this deal by the Hutch holding company, which it feels isn't within the purview of the Indian operations.

Sources close to Essar clarify that the letter to DOT is meant to be interpreted as a mere clarification on the indirect holding issue. But there may be a little more than that. Essar, it is learnt, has also raised security concerns about Orascom's stake acquisition in HTIL on the pretext that it provides services in Pakistan as well. Needless to mention, any issue related to security concern is looked at very closely and this one has been no exception. The bottom line is that this has rocked the once cheery relationship between Hutchison and Essar.

In hindsight, observers point out there have been some events in the past year that didn't make much sense for the JV. Perhaps the strangest of them related to Essar acquiring licences to seven new circles about a year ago-at a time when Hutchison Essar was a full-fledged JV. Essar, through a group company, Essar Spacetel, put in an application to provide cellular services in Orissa, Madhya Pradesh, Assam, North-East, Bihar, J&K and Himachal Pradesh. A couple of months later, another group company, Essar Teleholdings (ETHL), bought over the operations of Rajeev Chandrasekhar's BPL Communications, where incidentally Orascom was also amongst the suitors. And last September, Hutch signed a deal with Essar to acquire BPL Communications' operations and also bought over Essar Spacetel. It, therefore, remains unclear why it wasn't Hutchison Essar that applied for the seven new licences.

Clearly, from the Hutch point of view, an IPO is an imperative, given that HTIL invested huge sums of money (this year, HTIL will invest around Rs 8,100 crore across all its operations globally, out of which about Rs 5,800 crore will be invested in India) last year in its operations across various countries. And as most bankers are quick to state, the IPO should have actually taken place at least a year ago. Essar officials maintain that the issue is not about control and that the IPO plans are on track. Hutch officials, when contacted by BT, declined to comment on any of the issues, but investment bankers point out that an IPO in 2006 from Hutchison-Essar appears unlikely. A source close to both the parties describes the issues as "if there is no unanimity between the shareholders, this IPO is not going to take place tomorrow". If that's the way it is, it will be an opportunity tragically lost for Hutchison Essar. Last fortnight, even as another high-profile spat in the telecom space between the Tatas and the Birlas was nipped in the bud, with the latter buying out the former, there's a question that's being increasingly heard within the industry: Are skyrocketing valuations translating into unbridled greed?