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Merger & Acquisition : Merger & Acquisition Vodafone& Hutchison Telecom

Presented By : Presented By Name Roll No. Hubert D’Sa Ashwin Shetty K. Kalyanraman Anitha Shinde 25 Vodafone& Hutchison Telecom Merger & Acquisition

Merger : In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Merger & Acquisition , also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile

Slide 4: Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. Market-extension merger - Market-extension merger - Two companies that sell the same products in different markets. Merger & Acquisition Types of M & A

Slide 5: Synergies: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations. Increased revenue/Increased Market Share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power. Cross selling: A manufacturer can acquire and sell complementary products. Economies of Scale: For example, managerial economies such as the increased opportunity of managerial specialization. Merger & Acquisition Motive Behind M & A

Slide 6: Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. 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. Resource transfer: Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources Merger & Acquisition Motive Behind M & A

Slide 7: Gain market share Economies of scale Enter new markets Acquire technology Utilization of surplus funds Managerial Effectiveness Strategic Objective Vertical integration Merger & Acquisition Need of Merger & Acquisitions

Slide 8: Finalize strategy & Due diligence Valuation / Negotiations Board meeting / Application to High court Notices and General body meeting Approval by court Merger & Acquisition Structuring an M & A

Slide 9: Merger & Acquisition 2007- 08 Global TOP 5 M&A Deals

Slide 10: Vodafone purchased stake in Hutch (Hutchison Telecom International) for USD 11.08 billion Merger & Acquisition

Slide 11: Founded : 1983 as Racal Telecom, independent 1991 Group : Vodafone Plc Headquarters : Berkshire, UK Key People : Vittorio Colao, CEO & Sir John Bond, Chairman Industry : Mobile Telecommunications. Presence : Equity Interest in 25 Countries & Network Partner in 42 Strength : 2,30,000 (Employees) Revenue : £ 35,478 Million(14.1% Growth) Net Income : £ 10,047 Million(10.1% Growth) EPS : 7.51 Pence Dividend Per Share(11.1% Growth) Merger & Acquisition Background – Vodafone (Voice Data Fone)

Slide 12: Operations : 1992 Circles : 16 + license for 6 circles Revenue : $ 1,282 Million EBITDA : $ 415 Million Operating Profit : $ 313 Million Subscriber Base : 29.2 Million ARPU : Rs. 340.15 Merger & Acquisition Background – Hutch - Essar

Slide 13: 1992: Hutchison Whampoa and Max Group established Hutchison Max 2000: Acquisition of Delhi operations Entered Calcutta and Gujarat markets through ESSAR acquisition 2001: Won auction for licenses to operate GSM services in Karnataka, Andhra Pradesh and Chennai. 2003: Acquired AirCel Digilink (ADIL - Essar

Subsidiary) which operated in Rajasthan, Uttar Pradesh East and Haryana telecom circles and renamed it under Hutch brand Merger & Acquisition Growth of Hutchison Essar

Slide 14: 2004: Launched in three additional telecom circles of India namely Punjab, Uttar Pradesh and West Bengal. 2005: Acquired BPL, another mobile service provider in India 2007: Vodafone acquired HTIL stake in Hutchison-Essar 2008: Vodafone acquired Dishnet Wireless, a service provider in Orissa and has successfully launched its services in the following circle. 2008: Vodafone launched the Apple iPhone 3G to be used on its 17 circle 2G network. Merger & Acquisition Growth of Hutchison Essar

Slide 15: Urban markets in the country had become saturated. Future expansion would have had to be only in the rural areas, which would lead to falling average revenue per user (ARPU) and consequently lower returns on its investments HTIL also wanted to use the money earned through this deal to fund its businesses in Europe The sale of its interests in India will enable Hutchison Telecom to become one of Asia’s best capitalized companies Relations between Hutchison Telecom and the Essar group of India will be key to the sale of Hutch's 67% stake in Hutch-Essar Merger & Acquisition Reasons for Hutchison’s Exit

Slide 16: None of its recent global acquisitions, including those of the German business of Mannesmann, telecom businesses in Japan and Belgium, were performing up to the mark Markets, including the US, were maturing and were not growing in a big way Stiff competition among almost all major players in the industry, including global telecom majors like BT,O2 of UK, Verizon from the US, Maxis Telecommunications of Malaysia, Orascom from Egypt, the Hinduja group, Reliance and Bharti Airtel from India Merger & Acquisition Why & How the deal came through…

Slide 17: Deal size and stake Fourth largest deal of the year 2007 (to date) at $13.3 bn ($11.1 bn plus $2 bn debt). Hutchison Essar valued at $18.8 bn. Regulatory Approvals Vodafone acquisition is subject to a number of approvals including from the Department of Telecommunications and the Government (FIPB). Foreign Direct Investment Policy Press Note 5 of 2005 provides that direct and indirect foreign shareholding in a telecom company cannot exceed 74%. Department of Telecom The Department of Telecommunication has given its nod All licensing conditions to be met by Vodafone. Foreign Investment Promotion Board Application for an approval from the FIPB still not been approved due to issues relating to the total direct and indirect foreign holding in Hutchison Essar. Merger & Acquisition

Slide 18: Accelerates Vodafone’s move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market India is the world’s 2nd most populated country with over 1.1 billion inhabitants India is the fastest growing major mobile market in the world, with around 6.5 million monthly net adds in the last quarter India benefits from strong economic fundamentals with expected real GDP growth in high single digits Increases Vodafone’s presence in higher growth emerging markets Merger & Acquisition Principal Benefits for Vodafone

Slide 19: Potential for Hutch Essar to bring Vodafone’s innovative products and services to the Indian market, including Vodafone’s focus on total communication solutions for customers Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices Merger & Acquisition Principal Benefits for Vodafone … Cont

Slide 20: "The announcement is a clear evidence of how we are executing our strategy of developing our presence in the emerging markets. Hutch Essar is an impressive, well-run company that will fit well into the Vodafone Group -Arun Sarin, CEO, Vodafone Ltd., in February 2007 "We exit the Indian market as one of the best capitalized telecom companies in the region which will enable us to react swiftly to new opportunities and to accelerate growth in our existing markets. -Canning Fok, Chairman, HTIL, in May 2007 Merger & Acquisition

Slide 21: HTIL financed the loan to minority shareholders Asim Ghosh & Analjith Singh for 15 % stake in Hutch-Essar The loan is a violation of External Commercial Borrowings (ECB) norms issued under FEMA. This is because the multi-layered transaction (for Ghosh and Singh's stake) has been funded by a local finance company, backed by a stand-by letter of credit issued by a Hong Kong entity at the instance of HTIL Since both the shareholders are fronting for HTIL, the 15 % minority shareholding is interpreted as foreign stake. Merger & Acquisition Foreign Exchange and Management Act (FEMA)

Slide 22: Finance Bill 2008 also proposes to ensure that capital gains tax should be levied on acquisitions in India. Buyer will be responsible for paying the tax after purchasing any capital asset - a share or debenture of a company in

India. The buyer will have to deduct TDS and failure to do so would leave him liable to pay the tax. The tax will have to be paid with a retrospective effect from June 2002. Department sent a notice to Vodafone, asking for about $1.7 billion as capital gains tax in the sale of 52% stake in Hutchison Essar to Vodafone It argues that the company should have deducted tax at source while making payment to HTIL Merger & Acquisition Taxation

Merger & Acquisition : Merger & Acquisition

Slide 2: Vodafone& Hutchison Telecom Merger & Acquisition

Merger : Merger In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Merger & Acquisition Acquisition An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile

Slide 4: Horizontal merger Vertical merger Market-extension merger Product extension Conglomeration Merger & Acquisition Types of M & A

Slide 5: Synergies: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations. Increased revenue/Increased Market Share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power. Cross selling: A manufacturer can acquire and sell complementary products. Economies of Scale: For example, managerial economies such as the increased opportunity of managerial specialization. Merger & Acquisition Motive Behind M & A

Slide 6: Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. 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. Resource transfer: Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources Merger & Acquisition Motive Behind M & A

Slide 7: Gain market share Economies of scale Enter new markets Acquire technology Utilization of surplus funds Managerial Effectiveness Strategic Objective Vertical integration Merger & Acquisition Need of Merger & Acquisitions

Slide 8: Finalize strategy & Due diligence Valuation / Negotiations Board meeting / Application to High court Notices and General body meeting Approval by court Merger & Acquisition Structuring an M & A

Slide 9: Vodafone purchased stake in Hutch (Hutchison Telecom International) for USD 11.08 billion HORIZONTAL MERGER: SIMILAR LINE OF ACTIVITIES Merger & Acquisition

Slide 10: Founded : 1983 as Racal Telecom, independent 1991 Group : Vodafone Plc Headquarters : Berkshire, UK Key People : Vittorio Colao, CEO & Sir John Bond, Chairman Industry : Mobile Telecommunications. Presence : Equity Interest in 25 Countries & Network Partner in 42 Strength : 2,30,000 (Employees) Revenue : £ 35,478 Million(14.1% Growth) Net Income : £ 10,047 Million(10.1% Growth) EPS : 7.51 Pence Dividend Per Share(11.1% Growth) Merger & Acquisition Background – Vodafone (Voice Data Fone)

Slide 11: Operations : 1992 Circles : 16 + license for 6 circles Revenue : $ 1,282 Million EBITDA : $ 415 Million Operating Profit : $ 313 Million Subscriber Base : 29.2 Million ARPU : Rs. 340.15 Merger & Acquisition Background – Hutch - Essar

Slide 12: Hutch was often praised for its award winning advertisements which all follow a clean, minimalist look. Its successful ad campaign in 2003 featured a pug named Cheeka following a boy around in unlikely places, with

the tagline, Wherever you go, our network follows. The simple yet powerful advertisement campaigns won it many admirers. Merger & Acquisition Hutch - Essar

Slide 13: 1992: Hutchison Whampoa and Max Group established Hutchison Max 2000: Acquisition of Delhi operations Entered Calcutta and Gujarat markets through ESSAR acquisition 2001: Won auction for licenses to operate GSM services in Karnataka, Andhra Pradesh and Chennai. 2003: Acquired AirCel Digilink (ADIL - Essar Subsidiary) which operated in Rajasthan, Uttar Pradesh East and Haryana telecom circles and renamed it under Hutch brand Merger & Acquisition Growth of Hutchison Essar

Slide 14: 2004: Launched in three additional telecom circles of India namely Punjab, Uttar Pradesh and West Bengal. 2005: Acquired BPL, another mobile service provider in India 2007: Vodafone acquired HTIL stake in Hutchison-Essar 2008: Vodafone acquired Dishnet Wireless, a service provider in Orissa and has successfully launched its services in the following circle. 2008: Vodafone launched the Apple iPhone 3G to be used on its 17 circle 2G network. Merger & Acquisition Growth of Hutchison Essar

Slide 15: Urban markets in the country had become saturated. Future expansion would have had to be only in the rural areas, which would lead to falling average revenue per user (ARPU) and consequently lower returns on its investments HTIL also wanted to use the money earned through this deal to fund its businesses in Europe The sale of its interests in India will enable Hutchison Telecom to become one of Asia’s best capitalized companies Merger & Acquisition Reasons for Hutchison’s Exit

Slide 16: None of its recent global acquisitions, including those of the German business of Mannesmann, telecom businesses in Japan and Belgium, were performing up to the mark Markets, including the US, were maturing and were not growing in a big way Stiff competition among almost all major players in the industry, including global telecom majors like BT,O2 of UK, Verizon from the US, Maxis Telecommunications of Malaysia, Orascom from Egypt, the Hinduja group, Reliance and Bharti Airtel from India On February 11, 2007, Vodafone agreed to acquire the controlling interest of 67% of holdings in Hutch-Essar for US$11.1 billion, Merger & Acquisition Why & How the deal came through…

Slide 17: Deal size and stake Fourth largest deal of the year 2007 (to date) at $13.3 bn ($11.1 bn plus $2 bn debt). Hutchison Essar valued at $18.8 bn. Regulatory Approvals Vodafone acquisition is subject to a number of approvals including from the Department of Telecommunications and the Government (FIPB). Foreign Direct Investment Policy Press Note 5 of 2005 provides that direct and indirect foreign shareholding in a telecom company cannot exceed 74%. Department of Telecom The Department of Telecommunication has given its nod All licensing conditions to be met by Vodafone. Merger & Acquisition

Slide 18: Accelerates Vodafone’s move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market India is the world’s 2nd most populated country with over 1.1 billion inhabitants India is the fastest growing major mobile market in the world, with around 6.5 million monthly net adds in the last quarter India benefits from strong economic fundamentals with expected real GDP growth in high single digits Increases Vodafone’s presence in higher growth emerging markets Merger & Acquisition Principal Benefits for Vodafone

Slide 19: Potential for Hutch Essar to bring Vodafone’s innovative products and services to the Indian market, including Vodafone’s focus on total communication solutions for customers Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices Merger & Acquisition Principal Benefits for Vodafone … Cont

Slide 20: Why Does The Hutch and Vodafone merger have problems -with respect to FEMA and tax? Hutchison Essor Indian Company Vodafone(Briton) A Foreign company HTIL(Whampoa group of Li-Ka Shing.Hong Kong A foreign company 67% Takes over Asim Ghosh-12% A.Singh and other companies (Minority) Essor group

Slide 21: Finance Bill 2008 also proposes to ensure that capital gains tax should be levied on acquisitions in India. Buyer will be responsible for paying the tax after purchasing any capital asset - a share or debenture of a company in India. The buyer will have to deduct TDS and failure to do so would leave him liable to pay the tax. The tax will have to be paid with a retrospective effect from June 2002. Department sent a notice to Vodafone, asking for about $1.7 billion as capital gains tax in the sale of 52% stake in Hutchison Essar to Vodafone It argues that the company should have deducted tax at source while making payment to HTIL Merger & Acquisition Taxation

Slide 22: The cellular telephony is extremely competitive, and India has one of the lowest 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 is relatively unknown in the Indian market. Besides the brand will cost money and take time• Telecom valuations are at a high and this could mean it is years Vodafone recovers its multi-billion dollar investment• Its big competitors are home-grown majors, who can manage the ‘environment’ better. Merger & Acquisition Immediate challenges

Slide 23: Superman' Shing at home in Hong Kong, 78-year-old Li Ka Shing is famed for his ability to exit businesses at the right price. His deal with Vodafone, would give him $11.1 billion, a coup considering he entered the Indian entity for as little as $2.6 billion. Li Ka Shing, Chairman, Hutchison Whampoa. Merger & Acquisition Men behind the deal

Slide 24: Vodafone's CEO since 2003, Sarin's bid would give him access to 24.4 million customers in one of the world's biggest and fastest growing markets. Arun Sarin, CEO, Vodafone Merger & Acquisition Men behind the deal

Vodafone agrees to acquire control of Hutch Essar in India

Vodafone announces today that it has agreed to acquire a controlling interest in Hutchison Essar Limited, a leading operator in the fast growing Indian mobile market, via its subsidiary Vodafone International Holdings B.V.

February 12, 2007 /India PRwire/ -- Vodafone announces today that it has agreed to acquire a controlling interest in Hutchison Essar Limited (“Hutch Essar”), a leading operator in the fast growing Indian mobile market, via its subsidiary Vodafone International Holdings B.V. Vodafone also announces that it has signed a memorandum of understanding (“MOU”) with Bharti Airtel Limited (“Bharti”) on infrastructure sharing and that it has granted an option to a Bharti group company to buy its 5.6% direct interest in Bharti.

The key highlights are:

Acquisition of a controlling interest in Hutch Essar

Vodafone announces it has agreed to acquire companies that control a 67% interest in Hutch Essar from Hutchison Telecom International Limited (“HTIL”) for a cash consideration of US$11.1 billion (£5.7 billion)

Vodafone will assume net debt of approximately US$2.0 billion (£1.0 billion) The transaction implies an enterprise value of US$18.8 billion (£9.6 billion) for Hutch Essar The acquisition meets Vodafone’s stated financial investment criteria Infrastructure sharing

MOU with Bharti Whilst Hutch Essar and Bharti will continue to compete independently, Vodafone and Bharti

have entered into a MOU relating to a comprehensive range of infrastructure sharing options in India between Hutch Essar and Bharti

Infrastructure sharing is expected to reduce the total cost of delivering telecommunication services, especially in rural areas, enabling both parties to expand network coverage more quickly and to offer more affordable services to a broader base of the Indian population

Local partners

The Essar Group (“Essar”) currently holds a 33% interest in Hutch Essar and Vodafone will make an offer to buy this stake at the equivalent price per share it has agreed with HTIL

Vodafone’s arrangements with the other existing minority partners will result in a shareholder structure post acquisition that meets the requirements of India’s foreign ownership rules

10% economic interest in Bharti

Vodafone has granted a Bharti group company an option, subject to completion of the Hutch Essar acquisition, to buy its 5.6% listed direct interest in Bharti for US$1.6 billion (£0.8 billion) which compares with the acquisition price of US$0.8 billion (£0.5 billion)

If the option is not exercised, Vodafone would be able to sell this 5.6% interest Vodafone will retain its 4.4% indirect interest in Bharti, underpinning its ongoing relationship

Commenting on the transaction, Arun Sarin, Chief Executive of Vodafone, said: “We are delighted to be deepening our involvement in the Indian mobile market with the full range of Vodafone’s products, services and brand. This announcement is clear evidence of how we are executing our strategy of developing our presence in emerging markets. We have concluded this transaction within our stated financial investment criteria and we are confident that this will prove to be an excellent investment for our shareholders. Hutch Essar is an impressive, well run company that will fit well into the Vodafone Group.”

Sir John Bond, Chairman of Vodafone, said: “India is destined to become one of the largest and most important mobile markets in the world and this acquisition will enable our shareholders to benefit from our increased investment in this market. We also look forward to playing our part in delivering the significant economic and social benefits which mobile telephony can bring to the people of India.”

Principal benefits

The principal benefits to Vodafone of the transaction are:

Accelerates Vodafone’s move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market

o India is the world’s 2nd most populated country with over 1.1 billion inhabitantso India is the fastest growing major mobile market in the world, with around 6.5

million monthly net adds in the last quartero India benefits from strong economic fundamentals with expected real GDP growth in

high single digits Hutch Essar delivers a strong existing platform in India

o nationwide presence with recent expansion to 22 out of 23 licence areas (“circles”)o 23.3 million customers as at 31 December 2006, equivalent to a 16.4% nationwide

market shareo year-on-year revenue growth of 51% and an EBITDA margin of 33% in the six months

to 30 June 2006o experienced and highly respected management team

Driving additional value in Hutch Essaro accelerated network investment driving penetration and market share growtho infrastructure sharing MOU with Bharti plans to reduce substantially network opex

and capex

o potential for Hutch Essar to bring Vodafone’s innovative products and services to the Indian market, including Vodafone’s focus on total communication solutions for customers

o Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices

Increases Vodafone’s presence in higher growth emerging marketso proportion of Group statutory EBITDA from the EMAPA region expected to increase

from belowo 20% in the financial year ending 31 March 2007 (FY2007) to over a third by FY2012

Operational plan for Hutch Essar

Vodafone will execute an operational plan to build on the strengths of Hutch Essar in order to capture the Indiantelecom growth opportunity.

Key strategic objectives

In the context of penetration that is expected to exceed 40% by FY2012, Vodafone is targeting a 20-25% market share within the same timeframe. The operational plan focuses on the following objectives:

Expanding distribution and network coverage Lowering the total cost of network ownership Growing market share Driving a customer focused approach

Site sharing

The MOU outlines a process for achieving a more extensive level of site sharing and covers both new and existing sites. Around one third of Hutch Essar’s current sites are already shared with other Indian mobile operators and Vodafone is planning that around two thirds of total sites will be shared in the longer term.

The MOU recognises the potential for achieving further efficiencies by sharing infrastructure with other mobile operators in India.

The MOU envisages the potential, subject to regulatory approval and commercial development, to extend the agreement to sharing of active infrastructure such as radio access network and access transmission.

Financial assumptions

As part of the operational plan, Vodafone expects to increase capital investment, particularly in the first two to three years, with capex as a percentage of revenues reducing to the low teens by FY2012. The operational plan results in an FY2007-12 EBITDA CAGR percentage around the mid-30s. Cash tax rates of 11-14% for FY2008-12 are expected due to various tax incentives and will trend towards approximately 30-34% in the long term.

As a result of this operational plan, the transaction meets Vodafone’s stated financial investment criteria, with a ROIC exceeding the local risk adjusted cost of capital in the fifth year and an IRR of around 14%.

Financial impact on Vodafone

The transaction enhances Vodafone’s growth profile on a pro forma statutory basis, with Vodafone’s revenue and EBITDA CAGR increasing by around one and a half percentage points over the three year period to 31 March 2010.

The transaction is expected to be broadly neutral to adjusted earnings per share in the first year post acquisition and accretive thereafter excluding the impact of intangible asset amortisation for the transaction. Including this impact, the transaction is expected to be approximately seven percent dilutive to adjusted earnings per share in the first year post acquisition and neutral by the fifth year.

The Board remains committed to its longer term targeted dividend payout of 60% of adjusted earnings per share. Furthermore, the Board expects the dividend per share to be at least maintained in the short term. The acquisition of HTIL’s controlling interest in Hutch Essar will be financed through debt and existing cash reserves and Vodafone expects pro forma net debt of around £22.8-23.3 billion3 at 31 March 2007 as a result of this transaction.

Further transaction details

The transaction is expected to close in the second quarter of calendar year 2007 and is conditional on Indian regulatory approval.

HTIL’s existing partners, who between them hold a 15% interest in Hutch Essar, have agreed to retain their holdings and become partners with Vodafone. Vodafone’s interest will be 52% following completion and Vodafone will exercise full operational control over the business. If Essar decides to accept Vodafone’s offer, these local minority partners between them will increase their combined interest in Hutch Essar to 26%.

In the event that the Bharti group company exercises its option over Vodafone’s 5.6% direct interest in Bharti, consideration will be received up to 18 months after completion of the Hutch Essar acquisition.

Vodafone will continue to hold its 26% interest in Bharti Infotel Private Limited (“BIPL”), which is equivalent to an indirect 4.4% economic interest in Bharti. Vodafone will now account for its entire interest as an investment.

UBS Investment Bank acted as financial adviser to Vodafone.

Notes to Editor

About Vodafone

Vodafone is the world’s leading international mobile communications group with operations in 25 countries across five continents and over 200 million proportionate customers by the end of January 2007, as well as 36 partner networks.

For further information, please visit www.vodafone.com

About Hutch Essar

Hutch Essar is a leading Indian telecommunications mobile operator with 23.3 million customers at 31 December 2006, representing a 16.4% national market share. Hutch Essar operates in 16 circles and has licences in an additional six circles. In the year to 31 December 2005, Hutch Essar reported revenue of US$1,282 million, EBITDA of US$415 million, and operating profit of US$313 million. In the six months to 30 June 2006, Hutch Essar reported revenue 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 Essar acquired BPL, thereby adding three circles, each operating with 900 MHz spectrum. In October 2006, Hutch Essar acquired Spacetel, adding six further licences, with operations planned to be launched during 2007.

The results of Hutch Essar are prepared in accordance with Hong Kong Financial Reporting Standards which may differ in material respects from the accounting principles applied by Vodafone

Vodafone agrees to acquire control of Hutch Essar in India

Vodafone announces today that it has agreed to acquire a controlling interest in Hutchison Essar Limited, a leading operator in the fast growing Indian mobile market, via its subsidiary Vodafone International Holdings B.V.

February 12, 2007 /India PRwire/ -- Vodafone announces today that it has agreed to acquire a controlling interest in Hutchison Essar Limited (“Hutch Essar”), a leading operator in the fast growing Indian mobile market, via its subsidiary Vodafone International Holdings B.V. Vodafone also announces that it has signed a memorandum of understanding (“MOU”) with Bharti Airtel Limited (“Bharti”) on infrastructure sharing and that it has granted an option to a Bharti group company to buy its 5.6% direct interest in Bharti.

The key highlights are:

Acquisition of a controlling interest in Hutch Essar

Vodafone announces it has agreed to acquire companies that control a 67% interest in Hutch Essar from Hutchison Telecom International Limited (“HTIL”) for a cash consideration of US$11.1 billion (£5.7 billion)

Vodafone will assume net debt of approximately US$2.0 billion (£1.0 billion) The transaction implies an enterprise value of US$18.8 billion (£9.6 billion) for Hutch Essar The acquisition meets Vodafone’s stated financial investment criteria Infrastructure sharing

MOU with Bharti Whilst Hutch Essar and Bharti will continue to compete independently, Vodafone and Bharti

have entered into a MOU relating to a comprehensive range of infrastructure sharing options in India between Hutch Essar and Bharti

Infrastructure sharing is expected to reduce the total cost of delivering telecommunication services, especially in rural areas, enabling both parties to expand network coverage more quickly and to offer more affordable services to a broader base of the Indian population

Local partners

The Essar Group (“Essar”) currently holds a 33% interest in Hutch Essar and Vodafone will make an offer to buy this stake at the equivalent price per share it has agreed with HTIL

Vodafone’s arrangements with the other existing minority partners will result in a shareholder structure post acquisition that meets the requirements of India’s foreign ownership rules

10% economic interest in Bharti

Vodafone has granted a Bharti group company an option, subject to completion of the Hutch Essar acquisition, to buy its 5.6% listed direct interest in Bharti for US$1.6 billion (£0.8 billion) which compares with the acquisition price of US$0.8 billion (£0.5 billion)

If the option is not exercised, Vodafone would be able to sell this 5.6% interest Vodafone will retain its 4.4% indirect interest in Bharti, underpinning its ongoing relationship

Commenting on the transaction, Arun Sarin, Chief Executive of Vodafone, said: “We are delighted to be deepening our involvement in the Indian mobile market with the full range of Vodafone’s products, services and brand. This announcement is clear evidence of how we are executing our strategy of developing our presence in emerging markets. We have concluded this transaction within our stated financial investment criteria and we are confident that this will prove to be an excellent investment for our shareholders. Hutch Essar is an impressive, well run company that will fit well into the Vodafone Group.”

Sir John Bond, Chairman of Vodafone, said: “India is destined to become one of the largest and most important mobile markets in the world and this acquisition will enable our shareholders to benefit from our increased investment in this market. We also look forward to playing our part in delivering the significant economic and social benefits which mobile telephony can bring to the people of India.”

Principal benefits

The principal benefits to Vodafone of the transaction are:

Accelerates Vodafone’s move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market

o India is the world’s 2nd most populated country with over 1.1 billion inhabitantso India is the fastest growing major mobile market in the world, with around 6.5

million monthly net adds in the last quartero India benefits from strong economic fundamentals with expected real GDP growth in

high single digits Hutch Essar delivers a strong existing platform in India

o nationwide presence with recent expansion to 22 out of 23 licence areas (“circles”)o 23.3 million customers as at 31 December 2006, equivalent to a 16.4% nationwide

market share

o year-on-year revenue growth of 51% and an EBITDA margin of 33% in the six months to 30 June 2006

o experienced and highly respected management team Driving additional value in Hutch Essar

o accelerated network investment driving penetration and market share growtho infrastructure sharing MOU with Bharti plans to reduce substantially network opex

and capexo potential for Hutch Essar to bring Vodafone’s innovative products and services to the

Indian market, including Vodafone’s focus on total communication solutions for customers

o Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices

Increases Vodafone’s presence in higher growth emerging marketso proportion of Group statutory EBITDA from the EMAPA region expected to increase

from belowo 20% in the financial year ending 31 March 2007 (FY2007) to over a third by FY2012

Operational plan for Hutch Essar

Vodafone will execute an operational plan to build on the strengths of Hutch Essar in order to capture the Indiantelecom growth opportunity.

Key strategic objectives

In the context of penetration that is expected to exceed 40% by FY2012, Vodafone is targeting a 20-25% market share within the same timeframe. The operational plan focuses on the following objectives:

Expanding distribution and network coverage Lowering the total cost of network ownership Growing market share Driving a customer focused approach

Site sharing

The MOU outlines a process for achieving a more extensive level of site sharing and covers both new and existing sites. Around one third of Hutch Essar’s current sites are already shared with other Indian mobile operators and Vodafone is planning that around two thirds of total sites will be shared in the longer term.

The MOU recognises the potential for achieving further efficiencies by sharing infrastructure with other mobile operators in India.

The MOU envisages the potential, subject to regulatory approval and commercial development, to extend the agreement to sharing of active infrastructure such as radio access network and access transmission.

Financial assumptions

As part of the operational plan, Vodafone expects to increase capital investment, particularly in the first two to three years, with capex as a percentage of revenues reducing to the low teens by FY2012. The operational plan results in an FY2007-12 EBITDA CAGR percentage around the mid-30s. Cash tax rates of 11-14% for FY2008-12 are expected due to various tax incentives and will trend towards approximately 30-34% in the long term.

As a result of this operational plan, the transaction meets Vodafone’s stated financial investment criteria, with a ROIC exceeding the local risk adjusted cost of capital in the fifth year and an IRR of around 14%.

Financial impact on Vodafone

The transaction enhances Vodafone’s growth profile on a pro forma statutory basis, with Vodafone’s revenue and EBITDA CAGR increasing by around one and a half percentage points over the three year period to 31 March 2010.

The transaction is expected to be broadly neutral to adjusted earnings per share in the first year post acquisition and accretive thereafter excluding the impact of intangible asset amortisation for the transaction. Including this impact, the transaction is expected to be approximately seven percent dilutive to adjusted earnings per share in the first year post acquisition and neutral by the fifth year.

The Board remains committed to its longer term targeted dividend payout of 60% of adjusted earnings per share. Furthermore, the Board expects the dividend per share to be at least maintained in the short term. The acquisition of HTIL’s controlling interest in Hutch Essar will be financed through debt and existing cash reserves and Vodafone expects pro forma net debt of around £22.8-23.3 billion3 at 31 March 2007 as a result of this transaction.

Further transaction details

The transaction is expected to close in the second quarter of calendar year 2007 and is conditional on Indian regulatory approval.

HTIL’s existing partners, who between them hold a 15% interest in Hutch Essar, have agreed to retain their holdings and become partners with Vodafone. Vodafone’s interest will be 52% following completion and Vodafone will exercise full operational control over the business. If Essar decides to accept Vodafone’s offer, these local minority partners between them will increase their combined interest in Hutch Essar to 26%.

In the event that the Bharti group company exercises its option over Vodafone’s 5.6% direct interest in Bharti, consideration will be received up to 18 months after completion of the Hutch Essar acquisition.

Vodafone will continue to hold its 26% interest in Bharti Infotel Private Limited (“BIPL”), which is equivalent to an indirect 4.4% economic interest in Bharti. Vodafone will now account for its entire interest as an investment.

UBS Investment Bank acted as financial adviser to Vodafone.

Notes to Editor

About Vodafone

Vodafone is the world’s leading international mobile communications group with operations in 25 countries across five continents and over 200 million proportionate customers by the end of January 2007, as well as 36 partner networks.

For further information, please visit www.vodafone.com

About Hutch Essar

Hutch Essar is a leading Indian telecommunications mobile operator with 23.3 million customers at 31 December 2006, representing a 16.4% national market share. Hutch Essar operates in 16 circles and has licences in an additional six circles. In the year to 31 December 2005, Hutch Essar reported revenue of US$1,282 million, EBITDA of US$415 million, and operating profit of US$313 million. In the six months to 30 June 2006, Hutch Essar reported revenue 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 Essar acquired BPL, thereby adding three circles, each operating with 900 MHz spectrum. In October 2006, Hutch Essar acquired Spacetel, adding six further licences, with operations planned to be launched during 2007.

The results of Hutch Essar are prepared in accordance with Hong Kong Financial Reporting Standards which may differ in material respects from the accounting principles applied by Vodafone

Vodafone agrees to acquire control of Hutch Essar in India

Vodafone announces today that it has agreed to acquire a controlling interest in Hutchison Essar Limited, a leading operator in the fast growing Indian mobile market, via its subsidiary Vodafone International Holdings B.V.

February 12, 2007 /India PRwire/ -- Vodafone announces today that it has agreed to acquire a controlling interest in Hutchison Essar Limited (“Hutch Essar”), a leading operator in the fast growing Indian mobile market, via its subsidiary Vodafone International Holdings B.V. Vodafone also announces that it has signed a memorandum of understanding (“MOU”) with Bharti Airtel Limited (“Bharti”) on infrastructure sharing and that it has granted an option to a Bharti group company to buy its 5.6% direct interest in Bharti.

The key highlights are:

Acquisition of a controlling interest in Hutch Essar

Vodafone announces it has agreed to acquire companies that control a 67% interest in Hutch Essar from Hutchison Telecom International Limited (“HTIL”) for a cash consideration of US$11.1 billion (£5.7 billion)

Vodafone will assume net debt of approximately US$2.0 billion (£1.0 billion) The transaction implies an enterprise value of US$18.8 billion (£9.6 billion) for Hutch Essar

The acquisition meets Vodafone’s stated financial investment criteria Infrastructure sharing MOU with Bharti

Whilst Hutch Essar and Bharti will continue to compete independently, Vodafone and Bharti have entered into a MOU relating to a comprehensive range of infrastructure sharing options in India between Hutch Essar and Bharti

Infrastructure sharing is expected to reduce the total cost of delivering telecommunication services, especially in rural areas, enabling both parties to expand network coverage more quickly and to offer more affordable services to a broader base of the Indian population

Local partners

The Essar Group (“Essar”) currently holds a 33% interest in Hutch Essar and Vodafone will make an offer to buy this stake at the equivalent price per share it has agreed with HTIL

Vodafone’s arrangements with the other existing minority partners will result in a shareholder structure post acquisition that meets the requirements of India’s foreign ownership rules

10% economic interest in Bharti

Vodafone has granted a Bharti group company an option, subject to completion of the Hutch Essar acquisition, to buy its 5.6% listed direct interest in Bharti for US$1.6 billion (£0.8 billion) which compares with the acquisition price of US$0.8 billion (£0.5 billion)

If the option is not exercised, Vodafone would be able to sell this 5.6% interest Vodafone will retain its 4.4% indirect interest in Bharti, underpinning its ongoing relationship

Commenting on the transaction, Arun Sarin, Chief Executive of Vodafone, said: “We are delighted to be deepening our involvement in the Indian mobile market with the full range of Vodafone’s products, services and brand. This announcement is clear evidence of how we are executing our strategy of developing our presence in emerging markets. We have concluded this transaction within our stated financial investment criteria and we are confident that this will prove to be an excellent investment for our shareholders. Hutch Essar is an impressive, well run company that will fit well into the Vodafone Group.”

Sir John Bond, Chairman of Vodafone, said: “India is destined to become one of the largest and most important mobile markets in the world and this acquisition will enable our shareholders to benefit from our increased investment in this market. We also look forward to playing our part in delivering the significant economic and social benefits which mobile telephony can bring to the people of India.”

Principal benefits

The principal benefits to Vodafone of the transaction are:

Accelerates Vodafone’s move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market

o India is the world’s 2nd most populated country with over 1.1 billion inhabitantso India is the fastest growing major mobile market in the world, with around 6.5

million monthly net adds in the last quartero India benefits from strong economic fundamentals with expected real GDP growth in

high single digits Hutch Essar delivers a strong existing platform in India

o nationwide presence with recent expansion to 22 out of 23 licence areas (“circles”)o 23.3 million customers as at 31 December 2006, equivalent to a 16.4% nationwide

market shareo year-on-year revenue growth of 51% and an EBITDA margin of 33% in the six months

to 30 June 2006o experienced and highly respected management team

Driving additional value in Hutch Essaro accelerated network investment driving penetration and market share growtho infrastructure sharing MOU with Bharti plans to reduce substantially network opex

and capexo potential for Hutch Essar to bring Vodafone’s innovative products and services to the

Indian market, including Vodafone’s focus on total communication solutions for customers

o Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices

Increases Vodafone’s presence in higher growth emerging marketso proportion of Group statutory EBITDA from the EMAPA region expected to increase

from belowo 20% in the financial year ending 31 March 2007 (FY2007) to over a third by FY2012

Operational plan for Hutch Essar

Vodafone will execute an operational plan to build on the strengths of Hutch Essar in order to capture the Indiantelecom growth opportunity.

Key strategic objectives

In the context of penetration that is expected to exceed 40% by FY2012, Vodafone is targeting a 20-25% market share within the same timeframe. The operational plan focuses on the following objectives:

Expanding distribution and network coverage Lowering the total cost of network ownership Growing market share Driving a customer focused approach

Site sharing

The MOU outlines a process for achieving a more extensive level of site sharing and covers both new and existing sites. Around one third of Hutch Essar’s current sites are already shared with other Indian mobile operators and Vodafone is planning that around two thirds of total sites will be shared in the longer term.

The MOU recognises the potential for achieving further efficiencies by sharing infrastructure with other mobile operators in India.

The MOU envisages the potential, subject to regulatory approval and commercial development, to extend the agreement to sharing of active infrastructure such as radio access network and access transmission.

Financial assumptions

As part of the operational plan, Vodafone expects to increase capital investment, particularly in the first two to three years, with capex as a percentage of revenues reducing to the low teens by FY2012. The operational plan results in an FY2007-12 EBITDA CAGR percentage around the mid-30s. Cash tax rates of 11-14% for FY2008-12 are expected due to various tax incentives and will trend towards approximately 30-34% in the long term.

As a result of this operational plan, the transaction meets Vodafone’s stated financial investment criteria, with a ROIC exceeding the local risk adjusted cost of capital in the fifth year and an IRR of around 14%.

Financial impact on Vodafone

The transaction enhances Vodafone’s growth profile on a pro forma statutory basis, with Vodafone’s revenue and EBITDA CAGR increasing by around one and a half percentage points over the three year period to 31 March 2010.

The transaction is expected to be broadly neutral to adjusted earnings per share in the first year post acquisition and accretive thereafter excluding the impact of intangible asset amortisation for the transaction. Including this impact, the transaction is expected to be approximately seven percent dilutive to adjusted earnings per share in the first year post acquisition and neutral by the fifth year.

The Board remains committed to its longer term targeted dividend payout of 60% of adjusted earnings per share. Furthermore, the Board expects the dividend per share to be at least maintained in the short term. The acquisition of HTIL’s controlling interest in Hutch Essar will be financed through debt and existing cash reserves and Vodafone expects pro forma net debt of around £22.8-23.3 billion3 at 31 March 2007 as a result of this transaction.

Further transaction details

The transaction is expected to close in the second quarter of calendar year 2007 and is conditional on Indian regulatory approval.

HTIL’s existing partners, who between them hold a 15% interest in Hutch Essar, have agreed to retain their holdings and become partners with Vodafone. Vodafone’s interest will be 52% following completion and Vodafone will exercise full operational control over the business. If Essar decides to accept Vodafone’s offer, these local minority partners between them will increase their combined interest in Hutch Essar to 26%.

In the event that the Bharti group company exercises its option over Vodafone’s 5.6% direct interest in Bharti, consideration will be received up to 18 months after completion of the Hutch Essar acquisition.

Vodafone will continue to hold its 26% interest in Bharti Infotel Private Limited (“BIPL”), which is equivalent to an indirect 4.4% economic interest in Bharti. Vodafone will now account for its entire interest as an investment.

UBS Investment Bank acted as financial adviser to Vodafone.

Notes to Editor

About Vodafone

Vodafone is the world’s leading international mobile communications group with operations in 25 countries across five continents and over 200 million proportionate customers by the end of January 2007, as well as 36 partner networks.

For further information, please visit www.vodafone.com

About Hutch Essar

Hutch Essar is a leading Indian telecommunications mobile operator with 23.3 million customers at 31 December 2006, representing a 16.4% national market share. Hutch Essar operates in 16 circles and has licences in an additional six circles. In the year to 31 December 2005, Hutch Essar reported revenue of US$1,282 million, EBITDA of US$415 million, and operating profit of US$313 million. In the six months to 30 June 2006, Hutch Essar reported revenue 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 Essar acquired BPL, thereby adding three circles, each operating with 900 MHz spectrum. In October 2006, Hutch Essar acquired Spacetel, adding six further licences, with operations planned to be launched during 2007.

The results of Hutch Essar are prepared in accordance with Hong Kong Financial Reporting Standards which may differ in material respects from the accounting principles applied by Vodafone

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Behind the Deal: Vodafone Takes Over Hutchison Whampoa's India Unit

Eager to grow in emerging markets, the London-based Vodafone Group waved a deal in front of Hong Kong's Hutchison Whampoa for its India business that was too good to refuse. George W Russell examines the transaction which put Indian

telecommunications on the global map, tested the skills of law firms and nearly fell foul of India's regulators.

Date: June 2007

Keywords (click to search): [Vodafone Hutchison Whampoa India deal]

Print article

Global corporate interest in India's emerging consumer class hit another spike in April 2007 when the Foreign Investment Promotion Board (FIPB) approved a proposal from the London-based mobile telecommunications provider Vodafone Group to buy a controlling stake in domestic cellphone operator Hutchison Essar. Vodafone had acquired a 52% interest in Hutchison Essar from the Hong Kong-based Hutchison Telecommunications International (HTIL) for about US$10.83 billion.

Not only was it one of India's largest foreign takeovers, it also attracted an unprecedented array of blue-chip legal teams from India and abroad. Linklaters, Thawar Thakore & Associates and Trilegal represented Vodafone Group, while Freshfields Bruckhaus Deringer, Khaitan & Co and Paul, Weiss, Rifkind, Wharton & Garrison advised HTIL. Herbert Smith and AZB & Partners represented minority shareowner Essar Group.

Meanwhile, Sullivan & Cromwell advised Goldman Sachs & Co as financial adviser to HTIL and, on the sidelines, Cleary Gottlieb Steen & Hamilton and Allen & Overy represented Reliance Industries and the Hinduja brothers, respectively, two of the unsuccessful bidders for the HTIL stake.

The Essar purchase has given Vodafone - the world's largest listed mobile operator by earnings and second largest by market capitalization after China Mobile - a foothold in the world's fastest-growing telecoms market. Indeed, Vodafone Group has far more customers (about 200 million) than the entire Indian market (about 120 million). Moving into new markets is also familiar ground for Vodafone: it operates or has an equity stake in 27 countries, with total revenues of US$58 billion in 2006 and 60,000 employees.

Meanwhile, Hutchison Essar is the third largest GSM mobile operator in India, with about 23 million customers. Its per-use revenues are higher than the Indian industry average. Thanks to widespread advertising, Hutchison Essar - known simply as Hutch in India - is a highly visible brand in India and, according to analysts, has a premium positioning in the market. However, Vodafone is likely to replace it with its own brand as it seeks to raise Hutch's market share from 16% to 20% in the first year.

"Vodafone has been looking at increasing its presence in the emerging markets where the growth is very high," says Sumit Modi, a telecoms analyst with Mumbai brokerage Emkay Shares. "India being among the fastest growing telecom markets with a huge potential for growth - penetration is below 15% - attracted Vodafone."

Legal issues facing the buyer

However, Vodafone's path towards building its Indian empire was far from easy. Numerous financial and regulatory roadblocks presented themselves. It had already made one foray into the market in 2005, when it bought a 10% stake in Bharti Tele-Ventures, which owns Airtel - India's leading mobile telecommunications operator in terms of subscriber numbers - for £820 million. Vodafone acquired 4.4% from Bharti Enterprises and 5.6% from Warburg Pincus.

It was hardly surprising when the mobile-phone group assembled a formidable legal team to facilitate its entry into what is still a difficult market. "Exiting one joint venture and participating in an auction for another company was logistically challenging," says Bobby Leach, group media relations director at Vodafone Group in London. "But gaining more exposure to India was very interesting for the deal team."

Vodafone turned to long-time adviser Linklaters as principal international counsel. "We have a longstanding relationship with Linklaters and it was natural to look to them to provide advice for this transaction," says Leach. London corporate partners Iain Fenn and Clodagh Hayes led the Linklaters team (Hayes had spearheaded the Bharti purchase team).

Expansion through its interest in Bharti was Vodafone's original India strategy, say analysts. However, Bharti, which was until relatively recently a tightly held family-run business, balked at the idea of outside control. "Vodafone wanted to increase its presence in India by increasing its stake in Bharti, which the management of Bharti did not allow," says Modi. Now, following approval of the Vodafone-Essar deal, the Bharti stake will be divested. Hayes will advise Vodafone on the sale of the stake.

The Mumbai-based Crawford Bayley & Co was the main Indian legal adviser to Vodafone on the Bharti deal. However, the firm, one of India's oldest, was left on the sidelines of the much larger Hutchison Essar transaction. Instead, Vodafone turned to Talwar, Thakore & Associates, with which Linklaters had announced a groundbreaking exclusive mutual referral partnership from January 2007.

Several partners who had quit Crawford Bayley in 2006 founded the new firm, so Vodafone once again found itself amidst familiar legal faces. "Many of the team at Talwar, Thakore & Associates, including Suresh Talwar and Kiran Khanna, advised Vodafone on its investment in Bharti and so they were also the natural choice to advise us on this transaction," says Leach.

Talwar Thakore wasn't the only Indian firm involved on the Vodafone side of the complex deal. "Given the scale and complexities involved we also sought advice from Trilegal," Leach adds. Rahul Mattan, a partner with the Delhi-based Trilegal, led a team scrutinizing Hutch's books - along with accounting firm Ernst & Young - as part of the due diligence process.

Pros and cons of the deal

Vodafone had good reason to seek a stake in Hutchison Essar. By the end of 2005, CEO Arun Sarin was under pressure to shore up Vodafone's languishing stock price. The company needed to make a significant move in emerging markets - the expected core of its future business - as its traditional European markets became saturated. "For the past year and a half,

Vodafone had been getting a lot of flak from institutional investors," says Jake Saunders, vice-president for Asia-Pacific at ABI Research in Singapore.

To be fair, Vodafone has posted better-than-forecast results as emerging markets growth compensated for a saturated Western Europe and kept the mobile phone group on track for its full-year targets. For the six months to September 30 2006, Vodafone tabled adjusted earnings before interest, taxation, depreciation and amortization of £6.24 billion - a 2.8% improvement from £5.91 billion a year earlier.

However, some merger and acquisition experts believe that Vodafone may have overpaid for Hutchison Essar. A recent consensus of analysts in Mumbai said Vodafone overpaid by 30% to 45%. According to analysts, the fair value of Airtel's mobile services is about Rs25,000 (about US$600) per subscriber. By contrast, Vodafone agreed to pay Rs35,000 per subscriber for Hutchison Essar.

When Vodafone Essar - as the company has been renamed - will make a profit in India remains to be seen. Modi says the average revenue per user for Indian telecoms providers is Rs5,400, while the operating margin is around 32% or Rs1,728 per customer per year. "It seems Vodafone will take a long time to break even in the Indian market," he adds. "Innovative services may give Vodafone an edge, but it will not be a significant one".

Generally, analysts are upbeat about the deal's implications for the telecoms industry as a whole. "The deal is a positive sign for the Indian telecom industry as it brings in the expertise of the management of Vodafone, who have a wide experience and presence in several telecom markets in the world," says Modi. "Although the deal would increase the intensity of competition, the customers would eventually be a beneficiary."

If there were reservations about Hutchison Essar's fit with the rest of Vodafone Group, even more questions were raised about why Hutchison Whampoa would sell off its most profitable business. Shares of Hutchison Telecom fell sharply following the news of the deal. "The weakness in the share price [reflects] uncertainty over how Hutchison will handle the cash," says Wong Chi-man, an analyst at Everbright Securities in Hong Kong.

Hutchison Whampoa is understandably cagey about public comment on the Essar deal, noting that the FIPB was only one of several Indian government bodies whose assent was needed. "We are still awaiting formal approval," says Edith Shih, the conglomerate's group general counsel in Hong Kong.

HTIL shareholders quickly approved the sale of the stake in March 2007. "We received overwhelming support from our shareholders for this transaction," HTIL chief financial officer Tim Pennington said after the vote.

After all, Hutchison needs funds for its own 3G expansion in Australia, Hong Kong and Italy as well as to fund new ventures in Indonesia, Sri Lanka and Vietnam. Losses from the group's global 3G business are still enormous, but narrowed to a lower-than-expected HK$20 billion (US$2.56 billion) from HK$36.28 billion in 2005.

In addition, there had been friction between Hutchison and Essar in recent months over two recent transactions: the sale of a stake in the venture to Egypt's Orascom (which has interests in neighbouring Bangladesh and Pakistan) and the abortive purchase of Mumbai-based BPL

Mobile. "The business was getting affected due to the issues between Hutchison and Essar," says Modi.

Legal issues facing the sellers

Freshfields Bruckhaus Deringer advised HTIL on the transaction with a team led by Hong Kong-based corporate partner Robert Ashworth, London-based finance partner Perry Noble and corporate partner Natasha Good. "This was a fascinating transaction to work on, with a very tight timetable requiring seamless round-the-clock service between London and Hong Kong," Noble said in a statement issued by the law firm.

HTIL's Indian law firm was Khaitan & Co, led by senior partner Haigreve Khaitan. The firm acknowledged the complexity of the transaction. "It involves the exit of a shareholder from an Indian telecommunications company ... at a time when the foreign direct investment limits throw up their own challenges in addition to the discussion, even at a national level, of the validity and enforceability of shareholders' agreements and rights and obligations," Khaitan says in a recent deal note.

However, HTIL's legal issues could be far from over. India's Central Board of Direct Taxes has demanded that the company pay US$1.9 billion in capital gains tax over the share sale under Section 163 of the Income Tax Act, 1961. HTIL has responded that no tax is payable in India, as the 52% was transferred directly from HTIL and routed through CGP Investment, which is incorporated in the Cayman Islands, to Vodafone.

The diversified and privately held Essar Group continues to hold a 33% stake (two-thirds of which is offshore) in the re-branded Vodafone Essar. A consortium of Indian businessmen, led by Hutchison Essar's managing director Asim Ghosh and MaxIndia healthcare group's chairman Analjit Singh, hold the remaining 15% stake. That 15% was the source of much contention as the FIPB deliberated over the purchase, deferring it three times in March and April 2007 before approving it.

When the company announced the transaction, it also said it planned within weeks to offer to buy Essar's stake at the same price per share being paid to HTIL. However, Vodafone acknowledged that foreign investment caps prevented it from directly acquiring HTIL's entire 67% interest in Hutchison Essar.

Picking up a new client, Herbert Smith advised Essar Group on its partnership terms with Vodafone. The firm's India group head Nimi Patel and corporate partner Richard Lewis led the team, which also included Nick Elverston, Tim Steadman, Clive Barnard and Michelle Chan. "This deal is significant for a number of reasons," Lewis said in a statement. "Not only does it highlight continued M&A activity in the international telecoms sector, but it also confirms the importance of the Indian market to global brands such as Vodafone."

As part of the deal, between the third and fourth years, Essar Group gets the option to sell its stake in Vodafone Essar to Vodafone for US$5 billion. Essar also gets the option to sell between US$1 billion and US$5 billion of Vodafone Essar shares to Vodafone at a price determined by an independent appraiser. Essar's risk is thus capped, notes Jon Thorn, fund manager at India Capital Fund in Hong Kong. "They can take advantage of the upside from the telecoms business, which is growing in India at a phenomenal rate."

The FIPB took a while to be persuaded that the deal would not push the overall foreign shareholding in the operator above the threshold of 74%, the limit under Indian law. The foreign holding now comprises Vodafone's 52% plus another 22% held offshore by the Essar Group.

The board rejected a petition filed by Telecom Watchdog, an Indian consumer group, which claimed Hutchison Telecom breached local rules limiting foreign ownership in phone-service companies to 74%.

However, the deal faces other challenges. Former BPL Mobile chairman Rajeev Chandrasekhar wrote to India's prime minister, Manmohan Singh, to ask for an investigation into the deal. "The complex multi-layered financing transactions circumvent the spirit of sectoral caps," he wrote.

Key Players on the Deal

Vodafone International Holdings (a subsidiary of Vodafone Group) acquires Hutchison Essar, a joint venture between Hutchison Telecommunications International (a subsidiary of Hutchison Whampoa) and Essar Group.

Vodafone Group (buyer)International counsel: LinklatersIndian counsel: Thawar, Thakore & Associates and Trilegal

Hutchison Telecommunications International (seller)International counsel: Freshfields Bruckhaus DeringerIndian counsel: Khaitan & CoUS counsel: Paul, Weiss, Rifkind, Wharton & Garrison

Essar Group (seller)International counsel: Herbert SmithIndian counsel: AZB & Partners

Goldman Sachs & Co (financial adviser to seller)Lead international counsel: Sullivan & Cromwell

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Ruias make Rs 22,000cr cashBoby Kurian & Samidha Sharma, TNN Apr 1, 2011, 12.45am IST

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Shashi Ruia

MUMBAI: Shashi and Ravi Ruia of Essar, the two multi-billionaire brothers at the helm of a steel-to-shipping conglomerate, just got a whole lot richer. On Thursday, they decided to sell their 33% stake in Vodafone Essar Ltd for $5 billion (around Rs 22,000 crore) and exit the mobile telephony joint venture.

The deal comes after several public spats between the two partners over the course of their four-year journey together. Vodafone Essar is India's second largest mobile phone company in terms of revenue and third largest in terms of subscribers.