The board of British telecommunications giant Vodafone, headed by Indian-born Arun Sarin, will meet on Friday to finally approve a proposal to acquire India's fourth largest mobile phone service company, Hutchison-Essar, at a valuation of around $15 billion.
While that happens, Anil Ambani is stitching up private equity and debt to build a war chest for a bidding war to aid his Reliance Communications, investment banking sources say.
In case the board approves the proposal, an intense price war is expected to start early next week as Reliance Communications is waiting for Vodafone to take the first move, investment banking sources told Hindustan Times.
"The stage is set for a replica of Corus deal where Tata Steel and Brazilian Steel manufacturer — CSN are locked in a counter bidding exercise," a source close to the deal said.
However, much depends upon the Ruias, who control Essar's 33 per cent stake in the joint venture with HongKong's Hutchison group.
As of now, they have not decided whether to divest or retain their holdings in the company, which on current reckoning could bring them a neat Rs 23,000 crore in cash.
Investment banking sources said that Shashi Ruia wanted to exist from the telecom business, which is currently enjoying its peak valuations and invest the funds in other sunrise sectors such as power, where the Essar group is aggressively looking to increase its exposure. But his younger brother Ravi feels that the valuation would increase further in the coming days as the Indian telecom sector is growing at a faster pace.
The sources said that the Vodafone management may find it difficult to justify its case in the board for investment of a whopping $10 billion to buy 67 per cent in Hutchison-Essar and yet not having absolute control, if the Ruias do not sell their stakes. Under current Indian laws, Vodafone can acquire a maximum of 74 per cent but will not have its own nominee as the chief executive or as head of technology or finance.
Sources said that Reliance Communication's chief Anil Ambani, who has already tied up with lenders such as UBS and private equity firms such as Blackstone, Kohlberg Kravis Roberts & Co (KKR), The Carlyle Group and Texas Pacific Group to mobilise the resources to fund the transaction, is in discussions with the Ruias through a leading investment banker.
In case the Vodafone board decides to throw its hat into the ring, it may have to exit from Hutch's rival mobile phone service operator Bharti Airtel, in which it effectively owns 10 per cent which is currently valued at Rs 11,530 crore, at two levels.
It acquired 5.62 per cent directly in Bharti Airtel, which is the listed entity and it also holds a stake in the holding company Bharti Enterprises, which gives it effective control of 4.38 percent in Bharti Airtel. Vodafone had invested about Rs 6,700 crore in July, 2005 and has nearly doubled its investment.
Meanwhile, in order to create a war chest of around $15 billion, Ambani may divest stakes in Reliance Communications, investment banking sources said. As per the existing regulations, the same entity cannot hold more than 10 per cent in two competing operators in a circle.
The sources said that Reliance Communications might issue upto 60 crore fresh equity shares to private equity firms. Even after that, the promoter's stake in the company will remain above 51 per cent. At current market prices, the issue can fetch around Rs 28,000 crore. The placement would fetch in the vicinity of $ 8 to 9 billion, the sources said. Besides this, the company may raise debt of $7to $8 billion, they added.
Currently, the market cap of Hutchison Telecommunications International Ltd (HTIL), which controls 67 per cent stakes in Hutchison Essar is valued at $11.4 billion.
Man Financial Securities, an international securities firm, says 85 per cent of the value of HTIL comes from its holding in Hutchison Essar. At this price, the value of the 67 per cent it holds is $9.7 billion. Based on this assumption, the equity valuation of Hutchison Essar as a whole would be $14.4 billion.