Hutch – Vodafone Case Study

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Vodafone Hutch Acquisition

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Hutch – Vodafone Case Study:

Hutch – Vodafone Case Study

Merger & Acquisition:

Merger & Acquisition

Background of Hutch:

Background of Hutch 1992: Hutchison Whampoa and Max Group established Hutchison Max 2000: Acquisition of Delhi operations Entered Calcutta and Gujarat markets through ESSAR acquisition 2001: Won auction for licences to operate GSM services in Karnataka, Andhra Pradesh and Chennai 2003: Acquired AirCel Digilink (ADIL - Essar Subsidiary) which operated in Rajastan , Uttar Pradesh East and Haryana telecom circles and renamed it under Hutch Brand 2004: Launched in three additional telecom circles of India namely 'Punjab', 'Uttar Pradesh West' and 'West Bengal' 2005: Acquired BPL, another mobile service provider in India

Background of Vodafone:

Background of Vodafone 2007 : Vodafone acquires a 67% stake in Hutchison Essar for $10.7 billion. The company is renamed Vodafone Essar . 'Hutch' is rebranded to 'Vodafone' 2008: Vodafone acquires the licences in remaining 7 circles and starts its pending operations in Madhya Pradesh circle, as well as in Orissa, Assam, North East and Bihar 2011: Vodafone Group buys out its partner Essar from its Indian mobile phone business. It paid $5.46 billion to take Essar out of its 33% stake in the Indian subsidiary. It left Vodafone owning 74% of the Indian business 2014: On 11 April Vodafone acquires 100 percent stake in Vodafone India. On 6 August Vodafone India launches Vodafone RED 4. New Postpaid plans across India 2015: On 17 January Vodafone launches its iPhone plans across India.

Merger Details:

Merger Details The partners have agreed that Hutchison Essar will be renamed Vodafone Essar On February 11, 2007, Vodafone agreed to acquire the controlling interest of 67% in Hutch- Essar for US$11.1 billion Deal size and stake Fourth largest deal of the year 2007 (to date) at $13.3bn ($11.1bn plus $2bn debt). Hutchison Essar valued at $18.8bn.

Slide6:

The sale of its interests in India will enable Hutchison Telecom to become one of Asia’s best capitalized companies. The Hutch Essar deal has netted him a neat $8.48 billion. As telecom valuations in India started rising, Essar tried to increase its stake in the joint venture.  The key players looking to acquire Hutchison Essar were the Essar Group, Anil Ambani -owned Reliance Communications, the UK-based Vodafone, and a string of private equity (PE) players.

Why Everyone Wanted Hutch:

Why Everyone Wanted Hutch   It the fastest-growing cellular market in the world. Fourth largest mobile operator in India with 24.41 million subscribers. Present in 16 of 23 circles. Has license for six others barring Madhya Pradesh. Revenues of $908 million (Rs 4,086 crore ) in H1 2006 against $1.29 billion (Rs 5,800 crore ) in 2005. Operating profits of Rs 1,017 crore , EBITDA margins at 32.7 per cent in H1 2006

Valuation Of The Deal:

Valuation Of The Deal Hutch Essar’s value appeared so high was that it had the highest ARPUs – Rs 374, against the national average of Rs. 335 and Bharti’s Rs 348.50. While during 2005 (January-December), Hutch Essar had revenues of Rs 5,800 crore , it notched Rs 4,086 crore in the first half of 2006.  The key advantage was that during 2006, Hutch added 10.67 million subscribers.  The $54.8 billion Vodafone bagged Hutchison Essar , it valued the company at $18.8 billion or $770 per subscriber.

Valuation Of Hutch:

Valuation Of Hutch Value ($ billion) Hutch Essar 100% enterprise value: 18.8 Hutch Essar debt: 1.33 Equity Value: 17.47 Value of 67% stake: 11.10 Other Debt: 0.63 Net Value: 11.08 Value from Bharti stake sale: 1.62 Net outflow for Vodafone: 9.46

Interpretation Of The Valuation:

Interpretation Of The Valuation The increasing subscriber base has also meant that while average revenues per user (ARPU) are falling, revenues are on the rise.  The Cellular Operators’ Association of India (COAI) data shows that though ARPU fell by 10.66 per cent in the July-September 2006 quarter over the same period last year, revenues went up by 57.85 per cent. By then Vodafone expects to control 20-25 per cent of the market against 16 per cent now. The enterprise value per subscriber that Vodafone paid at $770.2 is much lower than the $1,066 it valued each Bharti subscriber in 2005.  Most importantly, the ARPU of Rs 374 for a Hutch is higher than Bharti’s Rs 349 . For 24.41 million subscribers, that works out to annual revenues of $2.4 billion (Rs 10,955 crore ).

ARPU:

ARPU For 24.41 million subscribers, that works out to annual revenues of $2.4 billion ( Rs 10,955 crore ).

Financing The Deal:

Financing The Deal Vodafone has $5 billion from the sale of its Japanese unit for $15 billion last year (the remaining $10 billion is expected to go back to shareholders). It will also get $1.62 billion cash from its 5.6 per cent stake sale in Bharti .  In addition, Vodafone has free cash reserves (for the first six months of 2006) in excess of $3 billion. It has also sold its 25 per cent stake in Swisscom Mobile and exited Belgium.

Taxation Of The Deal:

Taxation Of The Deal Finance bill 2008 also propose to ensure that capital gains tax should be levied on acquisition in India. Buyer will be responsible for paying the tax after purchasing any capital asset – a share or debenture of a company in India. The buyer will have to deduct TDS and failure to do so would leave him liable to pay the tax. The tax will have to be paid with a retrospective effect from June 2002. Department sent a notice to Vodafone, asking for about $1.7 billion as capital gains tax in the sale of 52% stake in Hutchison Essar to Vodafone. It argues that the company should have deducted tax at source while making payment to HTIL.

Strategic Goals Behind The Deal:

Strategic Goals Behind The Deal Emerging market focus Large players and competition in the market To provide superior shareholder returns. To delights it customer. To leverage global scale and scope, especially in delivering 3G services. To expand market boundaries. To build the best global Vodafone team. To be a responsible business and manage its impact on society, the environment and economy.

Synergies Claimed:

Synergies Claimed Vodafone gets access to the fastest growing mobile phone market in the world that is expected to touch 500 million subscribers by 2010. Cellular penetration in rural India is below 2%, but 67% of India's population lives in rural India. 3G is set to take off in India, allowing data and video to ride on cellular networks.

Challenges To Be Faced:

Challenges To Be Faced The cellular telephony is extremely competitive, and India has one of the lowest ARPUs in the world. It has an uneasy equation with Essar , which is one-third partner in Hutch- Essar . The Vodafone brand is relatively unknown in the Indian market which will cause the brand to cost money and take time. Telecom valuations are at a high and this could mean it is years Vodafone recovers its multi-billion dollar investment.

Strategy Of Vodafone:

Strategy Of Vodafone Rebranding Essar’s options Vodafone is working hard to mobilize tomorrow's world Introduction of new technologies and services Branches overall in India The immediate advantage of such an agreement is that it will be possible for both operators to tap the emerging rural market quickly.

Thank You:

Thank You Poonam Chavan MFM 03 Alisha Sayed MFM 34 Laxmi Gorityal MFM 39 Sanketa Raiban MFM 40

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