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JANUARY 28, 2007
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Taxing Times
The phase-out of central sales tax is yet another move towards ushering in the national goods and services tax (GST). The compensation to the states, in lieu of CST phase-out, will include revenue proceeds from 33 services currently being taxed by the Centre as well as 44 new services of an intra-state nature that will be traded by the states. However, VAT is the way forward, though much needs to be done to iron out the anomalies in the current VAT regime.

India, Ahoy!
Indian investments overseas are growing and how. For instance, total Indian investment in Latin America and the Caribbean has topped $3 billion (Rs 13,500 crore) so far. The latest investment is by ONGC Videsh, which acquired an oilfield in Colombia for $425 million (Rs 1,912.5 crore). Earlier, ONGC bought an offshore oilfield in Brazil for $410 million (Rs 1,845 crore).
More Net Specials
Business Today,  January 14, 2007
Who'll Win Hutch?

Its large India footprint, the lack of acquisition targets in the world's fastest growing telecom market, and the rosy prospect of grabbing majority control in India's fourth-largest cellular operator make Hutchison Essar a red-hot play.

...India is an interesting market along with many other markets in Asia and we are constantly on the look out for opportunities and will be evaluating many interesting prospects...
Spokesperson, Telenor, Norway's largest telecom company, to Business Today

Even if you aren't one of India's 143 million cellular phone users, it wouldn't take you too long to single out Hutchison Essar Ltd (HEL) as one of those "interesting prospects". India's fourth-largest wireless operator with a subscriber base of a little over 22 million has become the most sought after asset in the recent history of global mergers & acquisitions, what with Li Ka-shing, the promoter of the Hong Kong-headquartered $3.13-billion Hutchison Telecom International (HTIL), putting its 67 per cent holding in HEL on the block (19.55 per cent of it is held indirectly via a company called Telecom Investments India, which has HEL Managing Director Asim Ghosh and Max India Chairman Analjit Singh as shareholders). With HEL in play as the backdrop, and going by the reams of speculation generated in recent days, one would be tempted to assume that the company that made the statement about evaluating prospects in India could be Vodafone. Or Verizon. Or Maxis. Or Orascom. Or even the UK-headquartered Hinduja Group. After all, each of these global majors has either evinced, or is said to have evinced interest, in the assets of HEL, which stood at Rs 4,052 crore for the first half of 2006. Also in the running are domestic corporations Reliance Communications (R-Comm) and the Essar Group, which holds 33 per cent in HEL via its holding company Essar Teleholdings Ltd (ETHL).

But, even as HEL's value on paper-or should we say newspaper-hit an upper limit of $22 billion at the time of writing, BT learns that the scramble for Hutch may not be restricted to just the international and domestic players mentioned above. In fact, BT's analysis reveals that the likes of Verizon and Orascom are unlikely bidders, and, in fact, there could be a clutch of other global telecom giants readying to throw their hat into the ring for Hutch. These include Russia's Sistema, Spain's Telefonica and Telenor, with one of its spokespersons making the above italicised statement to BT, about looking out for opportunities in India along with other Asian markets. Besides a presence in the Nordic region and other parts of Europe, Telenor has operations in Asian countries like Malaysia, Thailand, Bangladesh and Pakistan. India would complete the picture for this company, which has a subscriber base in excess of 80 million.

Of course, Telenor is still a rank outsider in the bidding war for Hutch, but the short point is that virtually every global telecom major worth its transmission towers will be taking a close look at Hutch. Whilst most of them would be looking for majority control, a few wouldn't mind settling for a minority stake (perhaps the part offloaded by the Ruias of Essar, if at all they decide to do so). And financing the acquisition is the least of the problems, what with bankers falling over each other to bankroll the deal. The reasons for such enthusiasm are many. The biggest one is a presence in a market of 143 million subscribers that's growing 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 rural India), and as developed telecom markets slide into saturation, India is clearly the geography where most of the long-term potential is concentrated.

Arun Sarin/CEO
Background: The largest mobile company in the world, which closed fiscal 2006 with revenues in excess of £29 billion

Financial health: Huge revenues of £29.35 billion in 2006, but the net loss of over £21.8 billion overshadows the topline. Has been under fire from its shareholders for its slow growth rates

Presence: Spread across 26 countries. Also has partner networks in another 34 countries. Across its subsidiaries, JVs and affiliate partners, Vodafone has over 190 million subscribers

Why Hutch-Essar is important: A limited Asia presence-just a 3.3 per cent holding in China Mobile-coupled with the fact that most of its other markets like the UK, Germany and Australia are saturated, make a presence in the world's fastest growing market an imperative

» Buying out HTIL's stake and having Essar as the JV partner
» Buying out HTIL's stake and having another Indian holding the balance 33 per cent
» Buying HTIL's stake and then buying more from Essar to increase the total holding to 74 per cent. Essar could hold the balance 26 per cent

Anil Ambani/ Chairman
Background: Anil Ambani, Chairman, Reliance Communications (R-Comm), told the media recently that the acquisition of Hutchison Essar would fit well with his company's existing business. Ambani claims he has received commitments from large banks. He is teaming up with the Carlyle Group for this acquisition

Financial health: For the third quarter of 2006-07, R-Comm had revenues of Rs 3,525 crore with a profit after tax (PAT) of Rs 702 crore

Presence: Has a large CDMA presence in India, which cuts across 21 circles with a subscriber base of more than 25 million. GSM operations have 3.5 million subscribers in eight circles. Also owns Flag Telecom, a leading provider of bandwidth

Why Hutch-Essar is important: Will make R-Comm undisputed leader in India, with over 50 million subscribers. Also, by one estimate, could save $5 billion in capex and opex over the next five years if Hutch is acquired, as against setting up a greenfield pan-India GSM network

» Buying over HTIL' stake and working with Essar holding a 33 per cent stake
» Buying over HTIL and Essar to have 100 per cent control
» Buying over HTIL and Essar stakes completely and getting in a strategic partner at a later date

Ravi Ruia/ Vice Chairman
Background: Flagship business is steel, refinery has just started operations, but an early entrant into cellular telephony, with a decade of experience. Holds 33 per cent in Hutchison Essar-which stood at just around 18 per cent a couple of years ago-estimated to be worth roughly $7 billion

Financial health: Steel and refining are expected to generate cash flows of Rs 45,000-50,000 crore in a year. Claims to have lined up $25 billion in acquisition financing from global banks purely on the strength of the telecom holding company's financials

Presence: Via Hutchison Essar, it has a presence in 16 circles

Why Hutch-Essar is important: Has a head start with its 33 per cent, but may be holding out to secure the best valuation for it

» Well placed to be a buyer, a partner or a seller, but the third option is most likely

Background: Malaysia's largest operator with over 7 million subscribers did apparently put in a bid of $13.5 billion to buy out a 100 per cent stake in Hutchison Essar with private equity player Texas Pacific Group, but is said to have dropped out of the race. Sources, however, insist Maxis is still in the reckoning

Financial health: For 2004-05, Maxis' revenues stood at RM6.37 billion (Rs 8,060 crore), while profit after tax was RM1.71 billion (Rs 2,164 crore)

Presence: Apart from Malaysia, present in Indonesia and in India via Aircel where it has a 74 per cent stake, which it bought from C. Sivasankaran.

Why Hutch-Essar is important: Its Indian operation covers just seven circles with a subscriber base of 4.2 million. Hutch-Essar would be one surefire way to get a pan-India footprint

» Could pick up HTIL's stake and work with the Essar Group as a JV partner
» Could buy HTIL's stake and the Essar Group could dilute its holding in favour of an Indian partner; Maxis' current operations has the promoters of Apollo Hospitals as the Indian partner

Ashok Hinduja/ Executive Chairman
Background: Originally held a 5.11 per cent stake in Hutchison Essar, which they sold out in mid-2006 for $450 million

Financial health: Group has global revenues of $11 billion, and officials say raising cash isn't a problem

Presence: No presence globally as a cellular telephony service provider. The 5.11-per cent stake in Hutch-Essar was courtesy the Hindujas' presence in the Gujarat circle

Why Hutch-Essar is important: Looking at (finally) expanding in India, and there can't be more attractive opportunities than Indian telecom

» Buy HTIL's and Essar's holding which will give them 100 per cent ownership
» Buy HTIL's stake and work with the Essar Group holding 33 per cent

Ivan Seidenberg/ Chairman & CEO
Background: The US' second-largest cellular operator uses CDMA technology and has around 57 million customers; has Vodafone as a 44 per cent JV partner

Financial health: Revenues of $32.3 billion, with operating income of $7.38 billion

Presence: Restricted to the US

Why Hutch-Essar is important: Any presence outside a saturated US market is welcome

» Buy HTIL's stake and the Essar Group could hold the balance 33 per cent
» Could join hands with Vodafone to acquire the HTIL stake and Essar Group could be the Indian partner

And then there's Hutch itself, which analysts tout as the best-run Indian cellular operation in 16 circles, with clear leadership positions in Mumbai, Kolkata and Gujarat. Average revenues per user are higher than the industry average of Rs 335, and margins at the earnings before interest, tax, depreciation & amortisation (EBITDA) level are immensely attractive at close to 33 per cent. What's more, it isn't often that an acquisition with the juicy prospect of a majority holding comes along-that too of a player with a large footprint, with Hutch present in 16 out of a maximum of 23 circles.

So, who will snare Hutch via a deal, which one of the bidders touts as "largest to come out of Asia, ever (barring the transactions involving government-owned entities in China)"? The £29-billion Vodafone is one obvious bidder. At the time of writing, Vodafone had met with D.S. Mathur, Secretary, Department of Telecommunications (dot). Sources also indicated that Vodafone had mandated Ernst & Young (E&Y) to conduct a due diligence on Hutchison Essar. (Goldman Sachs is advising HTIL on this deal. Essar is being advised by JM Morgan Stanley).

Barring China, the UK operator does not have a presence in Asia and India fits in well with its objective of growing in emerging markets. Vodafone's recent decision to sell its 25 per cent holding in Swisscom for £1.8 billion, apart from diluting its holdings in Japan and Belgium, confirms its focus on markets that offer greater potential. "India is clearly the best frontier of growth in emerging markets, apart from possibly Indonesia. In that context, India for Vodafone is an obvious choice," thinks Subhabrata Majumder, Telecom Analyst, Macquarie Securities (India). For its part, Vodafone, in an official statement, says the Indian mobile market has great potential and that it is indeed considering the acquisition of a controlling interest in HEL. More importantly, it added that "such a transaction would be consistent with its stated strategy of selective acquisition opportunities in developed markets".


Hutchison Max Telecom Limited (HMTL), a joint venture between Hutchison and Max, wins the licence to provide cellular services in Mumbai

HMTL launches mobile services in India under the Max Touch brand name

Hutchison and Kotak together buy out a large part of Max India's holding through a JV called Telecom Investments India (TII). Max's stake in HMTL is down to 10 per cent from 51 per cent

2000 (January)
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 cent stake in Usha Martin Telekom in Kolkata circle

2000 (September)
Hutchison acquires a 49 per cent stake in Fascel, which operates in Gujarat, from Shinawatra

Hutchison puts in the bid to provide cellular licences in Chennai, Andhra Pradesh, Karnataka and Maharashtra. It wins all except Maharashtra

Essar Teleholdings sells its operations in Rajasthan, Uttar Pradesh (East) and Haryana to Hutchison 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

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 its operations in India

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