The Hutchison Essar Acquisition:Vodafone’s Foray into an Emerging Market
Vodafone’s Foray Into India• Vodafone was looking to enter Indian market. But FDI Policies Were not Favorable• On Feb 11, 2007 a Vodafone Group Plc an UK Based Telecom Company Acquired Hutchison Essar LTD (HEL).• Vodafone Bought A 52% Stake for US$ 11.1billion from Hutchison Telecom International.• Hutchison Essar Was Valued at US$ 19.3 Billion.• There Were Several Competitors like Reliance Communication, Essar and Hinduja Group.• The Biggest Deal Ever in the Indian telecom industry.
Cont..• HEL had an 29.2million Subscriber base in july 2007 and had an PAN INDIA Presence in 13 of total 28 circles in the country.• Also had highest ARPU of Rs.340.15.• The Final Deal Price was a discounted amount of US$ 10.9 billion.• The Acquisition realized Vodafone’s desire to enter emerging markets in a big was as a counter to the markets developed countries that were saturated.
Background -Vodafone• Vodafone was established in 1982 when Racal Strategic Radio Plc, a subsidiary of Racal Electronics Plc.• Later it was de-merged from Racal Electronics and named the Vodafone Group in 1991 by accounting its 20 percent shares of its value in to London stock Exchange.• During its expansion in overseas it purchases Air Touch Communication Inc in the US and changed its name to Vodafone Air Touch Plc.
Hutchison Essar Ltd• HEL was one of the leading mobile operators in India.• It was the fourth largest service provider in terms of customer numbers.• HEL was a Joint venture between HTIL and Essar. They started their services under the brand name Hutch in 1994 after it acquired the cellular license for the Mumbai circle.• The company was initially set up as a joint venture between HTIL and Max India Ltd.• In July 2005, Essar bought a 64 percent stake in BPL Cellular Ltd. for US$ 1.156 billion, making it the largest ever acquisition in the Indian telecom sector at that time
The Slugfest• Before initiating the bidding process, Vodafone had to clear many regulatory issues.• Stake with Bharti Airtel of 10%.• Clearances from regulatory bodies like FIPB, TRAI.• Essar made a bid of US $ 11 billion to acquire remaining 52% stake in HEL. Priority as already a partner in the venture.• Other contenders in race. Essar Group Anil Ambani-owned Reliance Communications The UK-based Vodafone Private equity (PE) players. Malaysia’s Maxis Communications Egyptian Telco Orascom
The Aftermath• On March 22, 2007, Vodafone signed a shareholder agreement with its Indian partner, Essar, according to which Vodafone - 52% Essar- 33% Minority shareholders, such as Asim Ghosh (Ghosh), Infrastructure development finance company (IDFC) and Analjit Singh together holds 15 per cent stake in the company.• Vodafone and Essar came to an agreement to run HEL jointly and agreed to change the name of the company to Vodafone Essar.• Vodafone sold back to Bharti its 5.6% direct stake in Bharti for US $ 1.6 bn.
Outlook• Vodafone planned to bring world class branding to India after the Hutch brand was replaced by the Vodafone.• Vodafone wanted to take 3G to the rural areas to provide hi- speed data services to the rural masses• Invest US $ 2 billion to expand its reach in rural areas.• Introduce ultra-low cost handsets in the rural market, procured from China.
Rivalry against Existing competitorsThe major competitors were:1. BSNL & MTNL(State Owned companies)2. Reliance telecommunications, Bharti Airtel, Essar and Orascom (Private India Owned Companies)
Bargaining Power of CustomersThere was no such provision as the tariffs weredecided by the company itself or in other wordsservice providers were the main drivers.Bargaining power of suppliersMobile handset providers: Vodafone took low costhandsets from ZTE.Software providers had a strong bargaining power.
Threats from new entrants• Uninor• Stel• DOCOMO• MTSThreats from substitutesLandline market in rural areas mainly provided byBSNL being a substitute of mobile technology was athreat to Vodafone.
SWOT AnalysisStrength:• Vision to become global leader• Good & strong relationship with customers• Best & latest TechnologiesWeakness:• Shortage of expensive and costly material• Meeting needs of each and every customer was a difficult task
SWOT AnalysisOpportunity:• Targeting and expanding into rural area• To become a pan- Indian operator like BSNL etc• Introduce several ultra low cost handsetsThreat:• Competitors• New entrants• Change in service as a change in taste.
What, according to you, promoted Vodafone toexpand into the emerging markets? Do you thinkVodafone’s acquisition of Hutchison Essar willhelp it in this regards?• Fast growth industry in Indian mobile market• 3G services with high speed data services widely spread in Indian market• In terms of making heavy profit
Critically analyze Vodafone’s decision to acquireHutchison Essar. Discuss whether it would havebeen more beneficial for Vodafone of it hadstarted business on its own from scratch ratherthan acquiring Hutchison Essar?• Hutchison Essar deal was overpaid• FDI allowed 74% stake of foreign companies in telecom sector.• Which could have helped them to get started services of their own
Discuss HTIL’s strategy of exiting the highlylucrative Indian market after it has developedbusiness in India from scratch?• 700% return on its investment in India• Exit was well timed• With future expansion, HTIL’s investment would have been non profitable