labels: essar group, hutchison essar, rex mathew, telecom
Hutch on the block?news
08 December 2006

Fed up of its differences with the Essar Group the Hong Kong-based Hutchison Whampoa may be planning of divesting its 52-per cent stake in Hutchison Essar. By Rex Mathew

Is Hutchison Essar, the third-largest GSM mobile operator in India after Bharti and BSNL, up for grabs? Hong Kong-based Hutchison Whampoa group, which holds a majority stake in Hutchison Essar, is reportedly planning to sell its stake.

Some of the largest private equity players based in the US are rumoured to be ready with bids for Hutchison Whampoa's stake in Hutchison Essar. Among Indian groups, Reliance ADAG - which owns Reliance Communications - is speculated to be keenly considering a bid.

While there is speculation that Hutchison group is exiting the telecom business completely, most telecom observers believe that only the stake in Hutch India is for sale. Hutchison Whampoa holds a 52-per cent stake in Hutchison Essar through Hutchison Telecommunications International (HTIL). The Essar Group is the other major shareholder, with a 33-per cent stake. Analjit Singh of Max India and Hutch India CEO Asim Ghosh also hold minority stakes.

Hutchison group is currently involved in a dispute with the Essar Group, over a 20-per cent stake sale in HTIL to Egyptian telecom company Orascom. The stake sale, which gives Orascom a 10 per cent beneficial stake in Hutchison Essar, was objected to by Essar, which raised the matter with the central government. There were reports that central intelligence agencies and the office of the National Security Advisor had objected to Orascom holding a beneficial stake, as it has telecom operations in Pakistan also.

There were differences between Hutchison and Essar over the merger of BPL Mobile with Hutch. The Essar Group acquired BPL Mobile and merged it with Hutch to raise its holdings in the latter to 33 per cent. There were reportedly some differences over valuations and over sorting out regulatory hurdles in the key Mumbai telecom circle.

Hutchison Essar should get a premium valuation as the Hutch brand is positioned in the upper end of the telecom market and enjoys higher average revenues per user (ARPU).

Telecom companies have seen their stock market valuations gallop over the last six months. While Bharti Airtel has emerged as the 5th most valuable Indian company with a market cap of Rs1.21 lakh crore as of yesterday, the market value of Reliance Communications has more than doubled since listing to Rs93,296 crore as of yesterday. Based on these, analysts expect Hutchison Essar to be valued between Rs60,000 and Rs65,000 crore.

However, it may not be easy for R-ADAG to acquire Hutchison's stake because of regulatory hurdles. Current regulations prevent a telecom operator from owning more than 10 per cent of another telecom company. Hence, R-ADAG may chose to team up with a private-equity company to bid for Hutchison Essar and would limit its own direct stake to 10 per cent. But the Essar group would most probably object to such an arrangement where it will have to share the space with another powerful domestic group.

Another option for R-ADAG is to buy out the Essar Group's and other minority shareholders also in Hutchison Essar, either alone or in partnership with a private-equity company, and merge Hutch with its own GSM subsidiary Reliance Telecom. Reliance Communication is reportedly in the process of setting up a large pan-India GSM network with a capacity of 75 million lines at a cost of $6 billion. Acquiring Hutch may be a better, though costlier, option and would allow Anil Ambani to emerge as the undisputed leader in telecom services in the country.

Hutchison Whampoa, owned by billionaire Li Ka-shing, is one of the largest industrial groups in Hong Kong with annual revenues in excess of $31 billion. The group's major interests are in ports, property development, infrastructure development and telecom. The group has operations in 56 countries and employs over 220,000 people. Hutchison Whampoa operates 44 ports across the globe and has a large retail network in Hong Kong and other East Asian countries.

Hutchison has 3G mobile operations under the brand '3' in Hong Kong, Australia, Israel and seven European countries, with a total 3G-subscriber base of 13.5 million. The group also has telecom operations through joint ventures under the HTIL umbrella in Hong Kong and Macau, India, Thailand, Israel, Sri Lanka, Ghana, Indonesia and Vietnam.

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Hutch on the block?