Indian mega phone deal may
fall on deaf ears
By Indrajit Basu
KOLKATA - By selling a 67% stake in Hutchison Essar, an Indian
mobile-telecommunications carrier, Li Ka-shing, Asia's consummate deal-maker
and renowned billionaire, could reap even more billions. But striking his
perhaps most lucrative deal yet could be heading him for trouble if his local
partner, the Essar Group, insists that it is offered the stake first.
Serious differences have erupted between Li and the Ruia family, founder of the
Essar Group, which claims it has an all-inclusive right of first refusal in its
agreement with the Hutchison Group. In
other words, Li's Hutchison Telecom International (HTI), which holds the 67%
stake in Hutchison Essar, cannot sell it to any buyer, Indian or foreign,
without first offering it to the Ruia family.
While Hutchison sources have argued that the right of first refusal applies
only if the stake is sold to select Indian telecom companies, the Essar Group
has leaked documents revealing that according to a "term sheet" type of
agreement entered between the two in July 2003, Essar has "tag-along rights"
that lay down conditions under which the first refusal could be enforced.
According to the Ruias, HTI's decision to offload its stake fully triggers
these two conditions, and if these are not met, the deal even stands the risk
of going to the courts.
Indeed, even as Li, with his demand of "at least [US]$14 billion for the stake"
is apparently on the verge of striking his canniest business deal yet, the war
for Hutchison Essar is emerging to be one of the most fiercely fought and may
have just one winner; the Ruias.
"The key to the sale are the Ruias," said Sunil Mittal, chairman of the Bharti
Group, which owns the Airtel mobile-phone service, in an interview to a daily
newspaper when he was asked why his company, which is the largest privately
owned mobile-telecom carrier in India, has not shown any interest in the deal.
Mittal added that the whole deal rests on the decisions of the Ruias on "what
to do, and if they intend to stay in the race, no Indian company can buy it".
The fact that Li wishes to sell out of India is intriguing. It is the
fastest-growing telecom market in the world, contributing about 80% of the
27-million-customer base of his telecom companies spanning Europe, the
Asia-Pacific region and North America. Although some analysts view the sale as
a move to help finance Li's ambitious mobile-telephony expansion plans in
Europe - where the group has sunk an estimated $25 billion since 2000 - many
feel that the main reason for Li's intended exit from India is a prolonged tiff
with his local partner.
Hutchison's relationship with the Essar Group has been anything but cordial.
From 2003, when through a series of stakeholders the Essar Group and HTI became
the two largest shareholders of Hutchison Essar, the two partners have had
differences.
The latest reports, which are based on leaked documents, reveal that even in
2003 the two failed to sign a shareholders' agreement and ran the company on
the basis of a "term sheet", which, according to legal experts, is an agreement
that is not legal binding (although the Ruias claim that the "term sheet" is a
legally valid document).
The relationship started souring considerably from December 2005 when HTI sold
a part of its stake to Egyptian telecom company Orascom, which gave it a 10%
indirect stake in Hutchison Essar. The Ruias disputed the sale, arguing that
they were not consulted in that deal and even appealed to the country's
authorities requesting a cancellation of the sale since, they claimed, Orascom
posed a security threat to India. The appeal resulted in a "show-cause notice"
from India's Department of Company Affairs to HTI seeking an explanation of why
the dilution was done without the local partner being informed. Hutchison
Telecom struck back by suddenly increasing its stake in Hutchison Essar by
buying out the 5% stake of another local minority shareholder (the Hinduja
Group).
That started an open skirmish between the two, with Essar calling off the
previously agreed sale of BPL Mobile (a mobile carrier in Mumbai in which the
Essar Group held the controlling stake individually) to Hutchison Essar,
forcing the Hutchison Group to move to the Mumbai High Court. And all this had
a deadly impact on Hutchison Essar's initial public offering (which would have
given Li a chance to cash out a part of his 67% stake), which was shelved
permanently last November. Finally, in a short press release last month, HTI
revealed that it wished to sell out of India and had already received several
bids for its stake in the Indian telecom company.
But for argument's sake, even if Li manages to establish that first offer of
refusal is applicable only in the event of sale to an Indian bidder (and not to
a foreign bidder), the Ruias could still call the shots. Current Indian
regulations do not allow a foreign buyer to hold more than 74% in an Indian
telecom company, which means that any foreign buyer would need an Indian
partner by law.
Meanwhile, with three serious bidders - the United Kingdom's Vodaphone Group,
India's Reliance Communication, and the Essar Group itself (although the
India/UK-based conglomerate, the Hinduja Group, has just thrown in its hat too)
- with very deep pockets, the valuation of Hutch Essar has skyrocketed. Li says
he wants at least $14 billion for parting with his stake in the fourth-largest
mobile carrier in the country; about 2.5 times what the Wall Street Journal
estimated last month when it broke the news of Li's sellout plan. "This is too
expensive," said Mittal. For that matter, Vodaphone, so far considered the
front-runner, is under pressure from a section of its shareholders to pull out
of the race.
Clearly, as the two partners continue to fight over the fine print of their
agreements, no one knows where the Hutch Essar deal - considered to be the last
big telecom opportunity in the Indian market - will head. But no matter who
wins, given India's peculiar regulatory norms that restrict a foreign owner to
a 74% stake in an Indian telecom company, and force other Indian bidders to own
either 100% or just 10%, it is clear the Ruias will have the last laugh.
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