Scrambling for Control of Hutch Essar—and a Piece of India's Mobile Phone Market

By No Analyst or Consultant

February 01, 2007 — CSO —

It's hard to say where valuation math ends and acquisitive ego begins with the current high bidding levels for Hutch Essar, India's second-largest mobile phone services provider, which has 22.3 million subscribers and Rs. 5,800 crore in revenues (US$1.3 billion). Active bidders include the world's largest mobile telecommunications company, Vodafone, the Anil Ambani-led Reliance Communications and the Hinduja Group. Verizon Wireless of the United States is also said to be kicking the tires of a potential deal.

Others in the fray are Japan's NTT DoComo, Egyptian telecom operator Orascom and other big-name investment banks, including Goldman Sachs, Blackstone and Texas Pacific. In a month, Hutch Essar's valuation has doubled to $20 billionthe enterprise value that Hong Kong parent Hutchison Whampoa likes for its 67 percent stake with partners. The other 33 percent is owned by the Ruias of the Mumbai-based Essar group, who seem open to either running the entire company themselves or in partnership with others.

At first sight, it seems obvious why Hutch Essar's valuations climbed so rapidly to such high levels. India's current high economic growth makes it an attractive market for foreign investors. Also, it is not every day that one gets to control a big player in a tightly regulated policy environment where entry barriers are high. What's more, the country's mobile phone subscriber base is adding 6 million new users each month and fast approaching 200 million, or a tenth of the world's subscribers. India Knowledge@Wharton interviewed faculty members at Wharton and the Indian School of Business, and other experts to get closer to the valuation metrics and see what's in store for a new owner at Hutch Essar.

At least two theories are floating around as to why Hutchison Whampoa wants to sell its stake in Hutch Essar. One is that the company badly needs the cash since it has committed up to $30 billion in investments across Europe. The other is that Li Ka-Shing, the Hong Kong-based shipping and real estate baron who controls Hutchison, wants to cash out. "He is a fairly astute entrepreneur and, in the past, he has been known to sell when he thinks valuations have maxed out," says Saurine Doshi, partner at consulting firm A.T. Kearney in Mumbai.

India's FDI regime prevents Hutch from buying out the Ruias of Essar and gaining complete ownership. Hutchison, however, would have to settle a dispute with Essar that recently arose and now seems headed for the courts. Essar claims that under its partnership agreement with Hutchison, it has the "right of first refusal" in case the latter sells its stake in Hutch Essar. Hutchison says that right of refusal is not a blanket agreement, and is good only in specific circumstances.

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