THE COMPANY - Hutch Essar currently has some 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. 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 DEAL - Vodafone is paying US$11.1 billion for a 67% interest in Hutch Essar, and will assume net debt of approximately US$2.0 billion. The transaction implies an enterprise value of US$18.8 billion for Hutch Essar. 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%.
WHY ? - Constant pressure on Vodafone to enter emerging markets . In the context of a population penetration that is expected to exceed 40% by FY2012, Vodafone is targeting a 20-25% market share in India within the same timeframe. According to Vodafone, India is the fastest growing mobile market in the world, with around 6.5 million new subscribers every month.
BHARTI TO GAIN BY - Vodafone announced that it has signed a memorandum of understanding with Bharti Airtel on infrastructure sharing and that it has granted an option to a Bharti group company to buy its 5.6% direct interest in 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. Vodafone granted Bharti 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 which compares with the acquisition price of US$0.8 billion.
The Essar Group - 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 Hutchison Telecom International.
Vodafone made no comment about whether the network would drop the Hutch branding, and become a Vodafone brand operator in India. 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 plans for future - 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%.
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