Vodafone acquires Hutch-Essar in $11.7bn deal

The boardroom drama around Vodafone’s bid for Indian GSM operator Hutchison-Essar seems to be approaching a conclusion, as Vodafone announced it had agreed terms with Hutchison Telecoms International to buy out its 67 per cent controlling stake for $11.7bn.

The big question, however, will be whether or not Essar, which holds 33 per cent of the firm, will continue to claim a right of first refusal over the Hutchison stake. Both Vodafone and Hutchison dispute this, claiming that it applies only to a takeover by an Indian competitor.

Vodafone has offered to buy Essar out on the same terms as Hutchison, in which event part of the stock would be resold to other minority shareholders in order to comply with Indian law on foreign investments. HTIL’s existing local partners are going to retain their existing position.

Essar might still choose to take Vodafone to court, but the tone of Vodafone’s announcement suggests confidence that this is not so, whether feigned or genuine. After all, Essar has been offered around $3bn to walk away. Vodafone has agreed to take on Hutch-Essar’s $2bn in net debt, implying an enterprise value of $18.8bn for the company.

At the same time, Vodafone has offered Bharti Airtel an option to acquire Vodafone’s 5.6 per cent stake in Bharti, although it intends to keep a further 4.4 per cent interest it holds indirectly. Simultaneously, a memorandum of understanding has been signed between Bharti, Vodafone, and Hutch-Essar, under which Bharti and Hutch will start reciprocal network sharing in parts of India where only one or the other is present.

Vodafone is financing the acquisition chiefly from its cash reserves.

John Delaney, principal analyst at Ovum, believes that Vodafone has called Essar on its trump card. “Essar’s claim to first refusal has always been controversial, and it seems that Vodafone is now convinced that it won’t stand up in court,” he said.

Essentially, Vodafone has found a way to take control and force Essar’s hand on 33 per cent stake, while remaining within the rules on foreign ownership.

“We’ve criticised Vodafone in the past for not having an emerging markets strategy. Last May, it finally articulated one.And Vodafone now controls an operator in one of the world’s biggest and fastest growing markets,” Delaney said.