Vodafone Buys Hutch Essar

Ivaylo
12 Feb, 2007
New York City

Vodafone appears to lead in the bid for Hutchison Essar in a fiercely contested battle last night in a deal that values the fourth largest mobile operator in India at $19 billion. It will be the largest foreign investment in the history of India. Vodafon bid topped the offer put forward by Reliance Communications, the second largest mobile operator, the one by Essar, conglomerate that already owns 33% of Hutch Essar and Hinduja group, the fourth bidder. vodafone may need additonal partners.

[R]9:30 AM NY, 7:30PM Mumbai –
Vodafone appears to bid the highest in the Hutchinson Essar auction.[/R]

Vodafone acquired 67% of Hutchison Essar in a deal struck last night that puts the fourth-largest Indian mobile operator value at $18.8 billion. Vodafone is known to make expensive telecom in the last seven years only to find it difficult to justify purchases at a later date. The deal is expected to provide a much-needed respite and boost to Vodafone stock in an otherwise luck-luster top-line growth at the British company, the largest mobile operator in the world.

Still, Arun Sarin, Vodafone CEO may be faced with question by some investor whether the group has overpaid. One shareholder has already said that the deal may get some resistance from shareholders of Vodafone on that premise. As part of the deal, the British company has signed an agreement for sharing its network with Bharti Airtel, which could help both companies to share telecom network and reduce network build-out cost.

Bharti was also granted an option to buy out Vodafone’s 5.6% of the 10% stake in the company for $1.6 billion, which is double the acquisition price. The deal is expected to be executed in the second quarter.

India is the world fastest growing mobile phone market with an additional 6.5 million net subscribers per month in the last quarter. Only 15% of people in India have cell phone service and less than half of country has cell phone coverage.

Vodafone may be looking at India as its largest market by subscribes in the next two years. Currently its German subscriber base is more than 26 million, and through a joint venture partner Verizon has more than 24 million subscribers in the U.S. Its Indian subscriber base is likely to reach 30 million or more by the end of calendar year 2008. If acquired, Hutch Essar or to be named Vodafone unit, is likely to be third largest cell phone company in India by the end of this year only to be trailed by Bharti and Reliance Communication.


[R]8:00AM NY-6:00PM Mumbai Sensex plummets on selling pressure.[/R]
The Sensex on BSE finished 348.20 points, or 2.39%, lower at 14,190.70. The market-breadth was very weak as there were seven decliners for each advancer. For 2,312 shares that declined on BSE, only 334 advanced and only 27 shares were unchanged. The turnover on BSE was Rs 3,266 crore, lower than Rs 4,332 crore on Friday. The turnover on NSE was Rs 8,908.45 crore, compared to Rs 9,175.13 crore on Friday.

Economic news

Industrial production in December 2006 advanced 11.1%, compared with 5.7% in the same month last year. The growth figure for November 2006 has also been revised upwards to 15.4%, from the earlier estimate of 14.4%. Growth in the manufacturing sector was 11.9% in December 2006, higher than 6.4% in December 2005, while electricity generation grew by 9.3% in December 2006, compared to 3.4% a year ago. The figures raised concerns that the Reserve Bank of India may hike the interest rates in order to curb inflation and to prevent overheating of the economy.

Vodafone won the battle for Hutch-Essar with a $19 billion bid. Vodafone will offer ultra low-cost handsets, and bring Vodafone live! to India. Hutch-Essar will aim at 20% to 25% of the market share. The company plans to keep the current management team.

India has been adding six million new subscribers for the last three months. Despite one of the fastest telecom market in the world only 15% of people in India have cell phone services and less than 50% of India can access telecom service through mobile phone. The subscriber growth in the current year is likely to exceed 30%.

Trading highlights

Global Broadcast was the most-active stock with a turnover of Rs 247 crore followed by Hindalco and newly-listed Technocraft.

IPO

Technocraft Industries India ended at Rs 100.90 on BSE on its first day on the market, with a volume of 98.63 lakh shares. It opened at Rs 125 on BSE, 19% over the IPO price of Rs 105 and reached an intra-day low of Rs 97.35 and high of Rs 130.

Decliners

Hindalco Industries, the aluminum large-cap, led the decliners, plunging 14% after acquisition of Novelis worried. Investors are nervous that the company may have overpaid and in the short term this will be a drag on the company financials. The stock closed at Rs 149.05. The total acquisition cost including assumed debt of $2.4 billion reached $6 billion. Novelis, registered in Canada but operating in the U.S. is the largest flat rolled products company in the world with a 19% share of the global market.

Reliance Communications also took a plunge of 4.63% to Rs 453.55, as it lost the bid to buy the Hutch Essar in a bid rivalry with Vodafone. Other large-cap decliners included BHEL, shedding 6.3% to Rs 2,348, Bharti Airtel, off 4.6% to Rs 718 and Gujarat Ambuja Cements, losing 4.54% to Rs 132.50.

Of stocks with representation in the Sensex index, Reliance Industries finished at Rs 1,354, losing 2.5%, Infosys dipped 0.5% to Rs 2,350 and oil leader ONGC slipped 2.1% to Rs 865. ICICI Bank ended at Rs 965 and TCS at Rs 1,254 each lower around 2.7%.


[R]7:30 AM Asia ends lower Monday with HK and South Korea leading decline.[/R]
Asian markets closed mostly lower on Monday. The Hong Kong Hang Seng Index closed 0.4% lower at 20,593. In Hong Kong, large-caps ended lower, led by China Mobile, which will have its weighting reduced in the Hang Seng Index and by property developers on worries about delays in U.S. interest rate cuts. China Mobile shed 1.6%. Hong Kong property developers declined after three U.S. Federal Reserve officials warned Friday they were ready to raise rates if U.S. economic growth was stronger than expected. Sun Hung Kai Properties dropped 1.7% and Cheung Kong Holdings fell 1%.

South Korean Kospi Index shed 0.9% to 1,414. Kookmin Bank dipped 2% after climbing 3.2% Friday, and Hana Financial Group fell 2%. Semiconductor makers settled lower, with Samsung Electronics off 2.2% and Hynix Semiconductor losing 2.2%. The Shanghai Composite Index soared 2.8% to close at 2,807. China Minsheng Banking gained 5.7%, China United Telecommunications rose 5.1% and China Petroleum & Chemical, known as Sinopec, advanced 4.8%. Australian S&P/ASX 200 dropped 0.1% to 5,924. All sectors of the market declined except for materials, energy and utilities. BHP Billiton rose 1.9% but Fairfax fell 1.2% as concern over advertising revenue outweighed the fact that its net profit topped market expectations. Lend Lease declined 4.7% after warning that its first half profit would be flat.


[R]6:30 AM Europe was lower on Monday on weakness in financial and tech stocks.[/R]
European markets were lower on Monday. In early trade, Frankfurt Xetra Dax shed 0.7 % to 6,862.36, the CAC 40 in Paris lost 0.7 % to 5,651.19 and London FTSE 100 slipped 0.3 % to 6,364.1.

Advancers

Infineon, German chipmaker, gained 1.7%. Infineon was best performing stock last week after announcing contract wins with Nokia and MasterCard. Share acquisition moves in the telecoms sector provided the market some succour. Spanish Telefonica said it had held talks with Italian Pirelli and was offered a small stake in Olimpia, which controls Telecom Italia. Telecom Italia shares gained 1.8 %, while Pirelli added 3.7% and Telefonica fell 0.6%. UK tour operator MyTravel Group bucked the lower travel sector trend, rising 26.4% after MyTravel and KarstadtQuelle-owned Thomas Cook agreed to merge to form an international leisure travel company. Vodafone Group rose 1.7% after the company agreed to buy a stake in India''s Hutchison Essar for $11.1 billion.

Decliners

ASML Holding, maker of equipment for manufacturing memory chips, fell 2%, while Franco-Italian chipmaker STMicroelectronics shed 1%. Industrial groups took a hit after recent strong sessions. MAN, the German truckmaker, fell 2.1 % after questions were raised about its future following its failure to acquire Swedish Scania. Airline Air France-KLM and cruise ship operator Carnival Corp each trading down more than 1.2%.

Oil

U.S. crude oil for March delivery fell 82 cents in electronic trading. The contract was down 74 cents at $59.15 a barrel, while London Brent crude was off 67 cents at $58.34 a barrel in early trade in London.