Vodafone to start Hutch due diligence; Essar may move court

Global telecom major Vodafone may start a due diligence exercise on Hutchison Essar today, according to a report in the Financial Times. Accounting firm Ernst & Young have been appointed to conduct the due diligence, according to the report. If true, this is a clear indication that Vodafone is currently in the lead to acquire a majority stake in Hutch-Essar.

So far Hong Kong-based Hutchison Telecommunications, which owns a majority stake in Hutch-Essar and is trying to sell-out, has not allowed any other bidder to inspect the books of Hutch-Essar. The preferential treatment given to Vodafone may not go well with other bidders like Reliance Communications and the Essar Group.

Senior Vodafone officials were in Delhi last week and they reportedly discussed the Hutch-Essar deal with the chairman of telecom regulator TRAI and senior officials of the department of telecom. They are said to have sought clarifications on the regulations regarding foreign investment in telecom companies. As per current regulations, foreign investment is capped at 74 per cent in the telecom sector. Vodafone is rumoured to be not very keen to have a domestic partner to hold the balance 26 per cent and would rather offer the stake to domestic investors through an IPO.

Vodafone has reportedly submitted a bid to Hutchison, valuing Hutch-Essar at $17 billion to $18 billion. The bid is lower than the minimum valuation of $21 billion indicated by Hutchison and most industry observers expect Vodafone to hike its offer after the due diligence is completed. The Essar Group is rumoured to have submitted an even lower bid of $16 billion and it is still not known whether Reliance Communications has placed a bid at all. The Hinduja group, which indicated its interest in Hutch-Essar last week, is said to be waiting for an invitation from Hutchison to place a bid.

Meanwhile, the Essar Group may approach the court over the dispute with Hutchison regarding the right of first refusal. The shareholder agreement between Hutchison Telecommunications and the Essar Group has a clause that gives the latter the right of first refusal in case Hutchison decides to exit the company. In other words, Hutchison has to offer its stake to Essar first and only if the latter declines can it sell-out to a third party.

The Essar Group, which holds a 33-per cent stake in Hutch-Essar, argues that the right of first refusal is applicable in all cases – irrespective of whether the buyer is a domestic or overseas entity. Hutchison's stand is that such right is applicable only if the buyer is any of the three large Indian telecom groups, Bharti, Reliance or Tata. Hutchison is understood to have made its stand clear in a communication to potential bidders and has also assured them that there would be no legal hurdles because of this dispute.

If the Essar Group indeed goes to court to enforce its claim of right of first refusal under all circumstances, it could stall the deal for several months. Most industry observers and insiders have not come out with their views on this issue as not many have any knowledge of the terms contained in the agreement between Hutchison and Essar. However, earlier statements by industry leaders like Sunil Mittal of Bharti indicate that Hutchison may be in a stronger position. Sunil Mittal had stated that no domestic group could acquire Hutch-Essar without the support of the Essar Group, which means the right of first refusal is not applicable if the buyer is an overseas entity.