Vodafone sets eyes on Hutch

BANGALORE- With an intent of expanding in the world's fastest growing cellular services market, the board of Britain's Vodafone Group Plc, has set to meet on thursday to consider the proposed $ 13.5 billion- plus offer for India's Hutchison Essar.

Such a move is said to trigger a bidding war with India's second largest mobile services firm, Reliance Communications Ltd., controlled by the Anil Ambani group.

However, Hutchison is unlikely to sell the unit for the price indicated so far.

India is the world's fastest growing mobile phone market, and Vodafone has long expressed an interest in stepping up its presence there. It currently has a 10-percent stake in India's number one player, Bharti Airtel Ltd., but Bharti Chairman Sunil Bharti-Mittal explained in October that it was not keen to sell a further chunk of the business to Vodafone.

A bid of $13.5-$14 billion could value Hutchison Essar at a 24 percent premium to Bharti, which has a market capitalisation of $25.7 billion, CLSA said in a client note.

At $14 billion, analysts estimate Hutchison Essar's enterprise value/EBITDA at 20.6 times year-to-March 2007 earnings, well above Bharti's 16.2 times.

India's GSM carriers reported a record 5 million new subscribers in November, including more than 1 million for Hutchison, taking total users in the country beyond 143 million.

Hutchison is the fourth-largest wireless operator in India with a 16 percent market share, behind Bharti's 21.5 percent, Reliance's 20.4 percent and state-run Bharat Sanchar Nigam's 16.5 percent.

Hutchison Essar is 67 percent-owned by Hong Kong tycoon Li Ka-shing's Hutchison Telecommunications International. Moreover, India's Essar group, which holds the remainder, has first right of refusal if Hutchison decides to exit.

Vodafone executives decided whether pursuing would be the largest offer to buy an Indian firm, and planned to offer a bid to Canning Fok, managing director of Hutchison Whampoa, and Ravi Ruia, vice-chairman of Essar, in London on Friday.

Such a move would likely prompt a counteroffer from Reliance.

A person close to Reliance Communications, which has joined forces with private equity houses including Blackstone to consider an offer for Hutchison's stake, is quoting that the company was monitoring developments, but had not yet decided to make a formal bid.

"We also believe that in the ongoing bidding war, Reliance Communication carries the risk of paying a significant valuation premium for Hutch Essar," CLSA said.

Macquarie Securities estimated Hutchison Essar's enterprise value at $13.7 billion, with an equity value of $12.18 billion.

Malaysia's Maxis Communications, which last year bought 74 percent in India's Aircel and Egypt's Orascom Telecom are also the potential suitors.

Hutchison is attracting interest due to its high revenue per user.

CLSA estimates its average revenue per user (ARPU) at 420 rupees ($9.4) a month, against an average 366 rupees for all providers. In comparison, Reliance has an ARPU of 354 rupees, while Bharti leads with 438 rupees, it said.

JM Morgan Stanley, the Indian unit of Morgan Stanley, is advising Essar and has also committed some investment if a few investors join Essar in buying out Hutchison, an investment banker said.