This is the month of mega mergers, given that it will witness the near-culmination of two of the biggest acquisitions in Indian corporate history. A victor may finally emerge in the ongoing battle between Tata Steel and Brazil's CSN to buy out Corus, and the bulging list of suitors for the Indian telecom major, Hutch Essar, may shrink to 1-2 bidders. But it's also a month of corporate contradictions with several dramatis personae involved in the two M&AS charting unexpected paths. It's a year when nothing can be taken for granted as far as India Inc is concerned.
A soft-spoken Ratan Tata has turned aggressor in the Corus deal; last week, he disagreed with FM P. Chidambaram at a public forum. Anil Ambani, who maintained that Reliance's CDMA was better than GSM before he parted ways with his elder brother Mukesh, is eyeing Hutch, a GSM player. Essar's Shashi Ruia, who sold out his stake in BPL Mobile and played a minority role in Hutch, is now a serious contender for it. Airtel's Sunil Mittal, who was believed to be a willing seller at the right price, is keen to remain one of the three potential players in the wireless sector. Vodafone's CEO Arun Sarin, who hinted he might increase his 9.9 per cent holding in Airtel, is suddenly energised about taking over the latter's competitor, Hutch.
More importantly, for many of the CEO participants, egos and personal equations seem to be as important as boring business strategies chalked out in corner rooms. Each one is lobbying to pursue—and further—his individual interest and corporate cause. It's a perfect setting for scorching scenes at the two M&A amphitheatres in Mumbai and London.
At the country's financial centre, there's complete chaos. To begin with, no one's sure why the Hong Kong-based Hutchison Whampoa decided to sell its 52 per cent stake in the Indian operation, Hutch Essar. Sources maintained that if any of the big boys sold, it was likely to be Airtel's Mittal, who had diluted his holding in favour of strategic partners like SingTel and Vodafone. Most agreed that Hutch would continue to be one of the three top players, along with Anil Ambani's Reliance Communication and SingTel/Vodafone.
There were several reasons that irked Hutchison owner Li Ka-Shing. The most important was his spat with Indian partner Essar, which owned 33 per cent in Hutch. It began in December 2005, when Egypt's Orascom became a 15 per cent owner in Hutch by buying an over 19 per cent stake in Hutchison's holding firm. This incensed Essar's Ruia, who came to know about the deal after it had become public knowledge. He scuttled it. "Orascom has so far not got the government's nod as we raised security concerns over its links with Pakistan," admit Essar sources.
In fact, the Essar-Orascom animosity is so volatile that an industry source contends that "if there's any possibility of Orascom buying out Hutchison's stake, Essar would rather quit the JV". Thanks to the Orascom episode, security issues were also raised against Hutchison, and Hutch's proposed IPO was postponed and later cancelled. So, when Li Ka-Shing realised he might get a great price, he decided to sell out. At the price being talked about, feels Grant Thornton's Harish H.V., the Hutchison owner will make more money from this deal than what he can earn from his global telecom operations in the next 5-6 years.
Over half-a-dozen suitors queued up to woo the bride with offers that valued Hutch at $21-27 billion. Among the first to initiate discussions with the willing parents-in-law was Reliance's Anil Ambani. A Citigroup report (January 2, 2007) agrees that Reliance would stand to gain the most if it buys Hutch, as the acquisition will make it the market leader (combined share: 38 per cent), enable its proposed entry into the GSM arena, and help the consolidation process in the telecom sector with the top three players controlling 80 per cent of the overall subscriber base.
Anil Ambani: Reliance stand to gain the most by the acquisition as it’ll make them market leader. However, their long-standing rivalry with Essar poses an obstacle.
Anil's interest in GSM has been guided by the fact that it's more attractive than CDMA from a financial perspective. For instance, the cost of GSM equipment and providing the service is cheaper than CDMA; even revenue per subscriber is higher in GSM's case. The average revenue per user per month is Rs 362 for GSM, and only Rs 256 for CDMA. If Anil gobbles up Hutch, his expansion costs will be cheaper since he can use the CDMA infrastructure to offer GSM services, and he'll get access to higher spectrum.
But powerful adversaries stand to thwart his way. Essar's Ruia would never make it easy for either Hutchison or Reliance. With the former, Ruia invoked the 'right of first refusal' clause that allows any JV partner to get the first opportunity to buy out the seller's stake. In this case though, while Hutchison insisted there was no such clause, Essar said it's a watertight one. The situation is set for a long-drawn-out legal battle. In addition, Ruia claims he has a $25 billion war chest and is in a position to purchase Hutchison's holding.
In case of Reliance, there is a contentious history to the rivalry, aka Dhirubhai Ambani vs Nusli Wadia. Reliance (pre-split) and Essar have been sworn enemies for decades. Both have lobbied against each other, and Essar feels Reliance was singly responsible for its troubles relating to steel and refinery units. So, Ruia will pull no punches to thwart Anil's ambitions. Hints an industry source, who has watched this corpo-battle, "Essar's business interests have been hit by Reliance several times in the past, and the former would not like a repeat scenario in telecom."
So, apart from jumping into the fray, Essar is pursuing an alternative strategy of cosying up to a third bidder, Vodafone. During his last week's visit to India, Sarin commented that the "Ruias are a good partner to work with". As if on cue, a source close to Essar said "it's studying all options", while another added that "by working out a deal with Vodafone, Essar is laying the ground for a partnership with which it would be more comfortable". If the bidding price goes up, the Essar-Vodafone tie-up will prevent Ruia from overstretching his finances.
Shashi Ruia: His spat over a stake sale to Orascom, which he thwarted, forced Hutchison to sell. Now, he’s a contender himself. Plan B: he’s also backing Vodafone’s bid.
Backing Vodafone is not a bad idea, as it may be the frontrunner in this race. For the British firm, there are compelling reasons to grab Hutch. At a personal level, it'll enhance Sarin's image, regarded as a global M&A artiste. In the recent past, his overtures have run into trouble with his shareholders, who rejected the $652-million price tag for Singlepoint, a mobile service provider, as too high. Given such opposition, Vodafone had finalised M&A criteria that specified minimum returns on invested capital over a certain time-frame.
At a broader level, Vodafone, with over 190 million global subscribers in September 2006, has to expand in emerging markets like India. According to telecom monitor Wireless Intelligence, the global demand in the wireless segment is 40 million new connections per month. While a quarter of this growth is coming from China and India, eight other markets like the US, Brazil, Russia, Pakistan, Bangladesh, Ukraine and Nigeria account for another 25 per cent. The demand in Europe, however, has stagnated.
This explains why Sarin agreed to be a minority partner in Mittal's Airtel. Now, he has the opportunity of his lifetime. For, aiding him in his endeavour to buy out a competitor is none other than Mittal himself. This is how the twisted logic works. The Bharti (Airtel) group is more concerned about its next sunrise battle in the retail sector. Out there, Mittal will face his biggest challenge from Mukesh Ambani of Reliance Industries, who has the clout and the capability to lobby against Mittal's recent retail tie-up with the US-based Wal-Mart group.
By helping Vodafone, and not invoking the "non-compete" clause with it, Mittal's killing two birds with one stone. He's opposing Mukesh Ambani's enemy, his younger brother Anil. And he's wooing commerce minister Kamal Nath, who will give the go-ahead to the Mittal-Wal-Mart agreement. Although Kamal Nath may have no role to play in the Hutch deal, he can still be an influential policymaker who can nudge it in Vodafone's favour. One has to remember that Kamal Nath lobbied with EU trade commissioner Peter Mandelson to garner support for L.N. Mittal's Arcelor bid. It was no surprise that prior to Sarin's meeting with Kamal Nath last week, Mandelson had a telephonic talk with the Indian commerce minister.
Compared to this complex chain of events unfolding around Hutch, Ratan Tata's job is simpler. All he has to do is to decide whether to re-bid for Corus, and at what price. After Brazil's CSN offered a price of 515 pence per share—15 pence higher than Tata—indications are that the latter may hike its bid by 7-10 per cent. Corus' stock price reacted accordingly, and jumped to 536 pence, or 7 per cent higher than Tata's initial bid of 500 pence. Investment bankers feel Tata will not bid higher than 550 pence; one of them would in fact go as far as to "tell him that under no circumstance should the price reach irrational levels".
The Price. Going by what's happening in both the mega mergers, that's the only thing no one's sure of.
