While markets have been buzzing with news of an imminent buyout of key stakes from Hong Kong-based Hutchison group in mobile telephony firm Hutchison Essar Ltd by global private equity firms, India's own Essar group is sitting pretty with a first right of refusal to buy those very stakes, and is contemplating a buyout of its foreign partner's stakes.
Sources close to the deal say the Ruias, who run Essar, will likely partner private equity investors to fund the buyout and form a special purpose vehicle (SPV) to help raise debt.
Essar also has a non-transferable management control clause in the joint venture, giving it a powerful position from where it can control the stakes in the company that has strong brand value and more than 19 million subscribers.
Essar group sources said it was open to the idea of enhancing its stakes. "The fact that the group has increased its holdings from 18 per cent to 33 per cent over a period in the joint venture clearly indicates the group objective," said a senior Essar official, who did not want to be identified.
Hutchison Telecommunications International Ltd (HTIL) has effective control of 67 per cent in the joint venture. Essar holds only 33 per cent but has management control and under the agreement, either party has the first right of refusal in the event of the other choosing to exit the venture.
Though Hutchison is a majority partner, its management control on paper is not transferable with any sale in its stakes. With such stringent procedures in the shareholders' agreement, the transaction may not command a market-driven valuation, say investment banking sources.
Sources close to the deal say the Ruias cannot completely buy out Hutchison's 67 per cent stakes in the venture, and would likely form a special purpose vehicle (SPV) with some global private equity firms to raise around $1 billion.
The SPV, in turn, will raise debt to fund the transactions. The sources said the Essar Group would raise between $1.5 and $2 billion to finance the SPV's equity capital. Initial estimates put the transaction size at between $7 and $8 billion.
"We do not comment on speculative news," an Essar group spokesman said when asked for his comments.
Financial industry sources said that Lehman Brothers, which has completed the due diligence on behalf of Hutchison Telecommunications International Ltd (HTIL), has put an equity valuation of around $11 billion (excluding debt) for Hutchison Essar.
US-based Texas Pacific Group and Malaysian telecom giant Maxis had made an unsolicited bid in November 2006 to acquire HTIL’s stake at an equity valuation of around $10 billion. However, HTIL had summarily rejected the bid, the sources said.
In July 2006, HTIL bought a 5.11 per cent equity stake in Hutchison Essar from the Hindujas for $450 million. At this rate, the equity valuation was $8.8 billion.