CASE STUDY THE HUTCHISON ESSAR ACQUISITION: VODAFONE FORAY INTO AN EMERGING MARKET
TRIPTI YADAV
Regn No.: 200721594
SYMBIOSIS CENTRE FOR DISTANCE LEARNING, PUNE, 2010
1
INTRODUCTION
In the year 2007, the world’s largest Telecom company in terms of Revenue, Vodafone Plc(Vodafone) made a major foray into the Indian telecom Market by acquiring a 52% stake in the Indian Telecom Company, Hutchison Essar Ltd(Hutchison Essar) through a deal with the Hongkong based Hutchison Telecommunications International Limited(HTIL). It was the biggest deal in the Indian telecom market. Vodafone main motive in going in for the deal was its strategy of expanding into Emerging and high growth markets like India.
In 2007, India has emerged as the fastest growing telecom market in the world outpacing China. But it still had low penetration rates, making it the most lucrative market for Global Telecom market.
Though Hutchison Essar was one of the established players in the market, HTIL had exited India as the urban markets in the country had become saturated. Future expansion would had have to be only in the rural areas, which would lead to falling average revenue per user(ARPU) and consequently lower returns on its investments. HTIL also wanted to use the money earned through this deal to fund its businesses in Europe.
Vodafone has to face many obstructions in clinching the deal- initial opposition for the Indian partners of HTIL, Essar Ltd, aggressive bidding by competitors, as well as regulators who took their time to approve the deal. But in the end, Vodafone bagged the deal outbidding other competitors. Though some critics felt that Vodafone had overpaid for Hutchison Essar, Vodafone contended that the price was worth paying as the deal would help him get a massive footprint in one of the most competitive telecommunications markets in the world.
2
ISSUES
The case will help us to: ? Understand the importance of international mergers and acquisitions as a growth strategy in the era of globalization.
? Understand the opportunities that emerging markets such as India offer to global business enterprises.
? Understand the issues and challenges faced by global business firms expanding into emerging markets.
? Understand the entry and exit strategies adopted by firms operating in the international markets.
? Understand the importance of the government’s policy in influencing the business strategy of a firm.
“With limited growth prospects in Vodafone’s core European markets, Sarin No.1 job right now is to convince investors that he has a viable long term growth strategy. And gaining control of a fast growing operator in India is the best opportunity he has to do it” John Delaney, principal analyst at Ovum in January 2007
3
“The announcement is the clear evidence of how we are executing our strategy of developing our presence in the emerging markets. Hutch Essar is an impressive, well run company that will fit well into the Vodafone group.” Arun Sarin, CEO, Vodafone Limited, in February 2007.
“We exit the Indian market as one of the best capitalized telecom companies in the region which will enable us to react swiftly to new opportunities and to accelerate growth in our existing markets.” Canning Fok, Chairman, Hutchison telecom International Limited, in May 2007.
VODAFONE”S FORAY INTO INDIA
On February 11, 2007, the Vodafone Group Plc (Vodafone), a UK-based telecom company, declared that it had finally bagged the fourth largest Indian Mobile Operators, Hutchison Essar Ltd. (HEL). This announcement ended an acquisition battle- probably the most ferociously fought- in the Indian telecom sector. Vodafone bought a 52% stake in HEL for US$11.1 billion from Hutchison telecom international Ltd. (HTIL), 33% stake was still held by the Essar group. The Company was valued at US$19.3 billion. Vodafone won the battle against other major competitors in the fray like Reliance Communications Ventures Ltd.(Reliance), Essar and the Hinduja group.
The deal, the biggest ever in the Indian Telecom industry, came after the Indian government’s(GOI) decision in 2006 to raise the limit on foreign direct investment(FDI) in the telecom sector from 49% to 74%. The deal was expected to infuse much needed FDI into the sector to meet the government’s targeted numbers of 500 million customers by 2010.
4
Industry and Government circles welcomed the deal and said that it would give a big boost to the telecom sector. It would help not just by capital infusion into the sector, but also by bringing on Vodafone’s experience in operating telecom networks. Hel was the fourth biggest player in the Indian Telecom Sector with a subscriber base of 29.2 million in July 2007. HEL had a pan India presence with 13 of the total 28 circles in the country. HEL also had the second highest average revenue per user (ARPU) of Rs.340.15, second only to the market leader Bharti India Ltd. (Bharti Airtel) which had an ARPU of Rs.343.17. India was, in 2007, the fastest growing mobile market in the world unseating China which used to occupy the top slot. The Foreign Investment Promotion Board (FIPB), gave its nod to the acquisition on April 27,2007, after having deferred the decision on the issue of FDI limit allowed in the telecom sector three times…..
VODAFONE
Vodafone, based in UK, was the world’s largest mobile communications company by revenue. It operated under the brand name ‘Vodafone’. The Brand name ‘Vodafone ‘ comes from ‘Voice data fone’, reflecting the company’s wish to provide voice and data services on the mobile phones. Vodafone operated in Europe, the middle East, Asia Pacific and the US….
MOBILE TELEPHONY IN INDIA
The Mobile Telephony revolution started in India when the GOI decided to allow private sector participation in the Indian telecom Sector. The new telecom policy of 1994 envisioned
5
provision of the world class telecom services at least to those who could afford to pay for them. In 1994, licenses were issued by Department of telecommunications (DOT) to the private operators to start mobile services in the four metropolitan cities of Delhi, Mumbai, Chennai and Kolkata.
VODAFONE EYES HUTCHISON ESSAR
In 2006, GOI raised the FDI limit in the telecom sector from 49% to 74%. The government increased the FDI limit in the sector after protracted lobbying by telecom players who were in dire need of capital. OTHER CONTENDERS FOR THE BID
Vodafone wasn’t the only company eyeing HEL, however the fast growth of the Indian mobile market coupled with a relatively low penetration level made it a very lucrative market. So it was no wonder that Vodafone’s announcement started the race for the acquisition of HITL’s stake in HEL among several interested players. Some of the important players in the fray were Reliance, Bharti Airtel, Essar and Orasom….
THE SLUGFEST
Before initiating the bidding process, Vodafone had to clear many regulatory issues. Bharti Airtel, in which Vodafone had a 10% stake, asked it partners to make it clear whether Vodafone wanted to continue its relation with it.
6
Moreover as GOI’s telecom policy allowed only 74% of FDI into the sector, Vodafone’s acquisition of a 67% stake in Hel would lead to the company crossing the limits of FDI allowed as both the players would be operating in the circles.
THE AFTERMATH
On March 22, 2007, Vodafone signed a shareholder agreement with its Indian Partner, Essar, according to which Vodafone would hold a 52% and Essar would continue to hold a 33% stake. Some other minority shareholders, such as Asim Ghosh, Infrastructure Development finance Company (IDFC) and Analjit Singh together would continue to hold the remaining 15% stake in the company.
OUTLOOK Vodafone planned to bring world class branding to India after the ‘Hutch’ brand was replaced by the Vodafone brand name. Vodafone wanted to build up its numbers in the Indian market mostly by expanding into the rural areas. Vodafone also wanted to launch a 3G service in the Indian market as soon as the government declared the 3G policy. Rather than using 3G services as a premium product targeted at upscale segment, Vodafone wanted to take 3G to the rural areas to provide hi speed services to the rural masses.
SWOT ANALYSIS
Vodafone is the largest operator of multiple, multinational wireless networks in the world. Vodafone has reached this position through a process of skillful acquisition of networks in different countries, and strong management skills and operational techniques that have 7
allowed it to build out wireless networks that are highly competitive. Its strengths are enhanced by the fact that it can data services that customer can access using the highly evolved third generation networks that it has rolled out in many markets. This report examines Vodafone’s market position, assesses its strengths and weaknesses, and explains the threats the operator faces, how it must respond to those threats, and where opportunities for future growth will come from.
STRENGTHS • • The main strength of Vodafone within the telecommunications market lies in its brand image and recognition. Vodafone, having established a global presence and having invested highly in marketing a differentiated image by promoting a Vodafone life style, currently enjoys a differentiating advantage that, if exploited properly, can offer a lead in competition. Leadership Position. The presence of Vodafone in numerous countries within Europe as well as in all part of the world enhances this image.
• •
• It allows customers to travel and enjoy easily the services of their home country operator. In the few countries that Vodafone is not physically present (e.g. Norway) it has well?established strategic alliances which allow for a better service of mobile clients. WEAKNESSES • The expansion of Vodafone has been completed at the expense of direct control of its operations. • Centralized control- low flexibility. • High Customer churns rates. • The company grew through a process of acquisitions of national telecommunications companies (e.g. the acquisition of the third biggest Czech mobile phone operator, Cesky mobile) rather than organic growth. This increased its subscribers’ base quickly, offering direct market knowledge and immediate additions of customer bases 8
at the expense of direct effective control of the subsidiaries. At the same time though, it implicitly imposed a centralized operational structure for the group, nominating the UK headquarters as the leading business unit running a much centralized marketing and handset procurement at group level. This has resulted in the neglect of local markets and local differences, allowing market share to be gained by smaller local competitors30. • Due to the highly saturated Western European market this has resulted in an increase in the price elasticity of demand, with consumers becoming continuously price oriented. This has resulted in high customer churn rates reaching the level of 32.8% in the UK compared to O2’s 24%.
OPPORTUNITIES • The telecommunications market, even though highly saturated in some regions offers great potential due to the ageing population and the sophistication of the consumers. It offers great opportunities through a careful market segmentation and exploitation of particular profitable segments. Different strategies should be pursued – simple phones and simplified pricing plans to the ageing population and more updated, sophisticated solutions for younger generations. The expanding boundaries of the market could provide further opportunities by allowing Vodafone to enter more aggressively into fixed?line service and to better enjoy the benefits of its high investment in 3G technology. Moreover the company has undertaken its first steps in establishing strategic alliances to develop customized solutions for end?users: Vodafone recently announced two new partnerships, one with supermarket group ASDA to launch an ASDA?branded mobile service in the UK, and another with electrical retailer DSG International to provide mobile solutions to small businesses32. This could further be enhanced to avoid being a late?entrant in this new method of distribution which offers access to a wide potential customer base.
• •
•
•
THREATS • The European part of Vodafone’s market is characterized by existing high levels of competition. 9
•
Major brands such as O2 and T?Mobile are exploiting the price sensitivity of customers and in this way they are building a stronger image and presence in the market. Indirect competition is also increasing further, through the presence of Skype and other related (not only voice) Internet?based services. This, combined with the upcoming European legislative measures is expected to limit further the tariffs for the network providers imposing further need for price cuts which could harm the bottom line profitability of the company.
•
10
doc_341767125.doc
TRIPTI YADAV
Regn No.: 200721594
SYMBIOSIS CENTRE FOR DISTANCE LEARNING, PUNE, 2010
1
INTRODUCTION
In the year 2007, the world’s largest Telecom company in terms of Revenue, Vodafone Plc(Vodafone) made a major foray into the Indian telecom Market by acquiring a 52% stake in the Indian Telecom Company, Hutchison Essar Ltd(Hutchison Essar) through a deal with the Hongkong based Hutchison Telecommunications International Limited(HTIL). It was the biggest deal in the Indian telecom market. Vodafone main motive in going in for the deal was its strategy of expanding into Emerging and high growth markets like India.
In 2007, India has emerged as the fastest growing telecom market in the world outpacing China. But it still had low penetration rates, making it the most lucrative market for Global Telecom market.
Though Hutchison Essar was one of the established players in the market, HTIL had exited India as the urban markets in the country had become saturated. Future expansion would had have to be only in the rural areas, which would lead to falling average revenue per user(ARPU) and consequently lower returns on its investments. HTIL also wanted to use the money earned through this deal to fund its businesses in Europe.
Vodafone has to face many obstructions in clinching the deal- initial opposition for the Indian partners of HTIL, Essar Ltd, aggressive bidding by competitors, as well as regulators who took their time to approve the deal. But in the end, Vodafone bagged the deal outbidding other competitors. Though some critics felt that Vodafone had overpaid for Hutchison Essar, Vodafone contended that the price was worth paying as the deal would help him get a massive footprint in one of the most competitive telecommunications markets in the world.
2
ISSUES
The case will help us to: ? Understand the importance of international mergers and acquisitions as a growth strategy in the era of globalization.
? Understand the opportunities that emerging markets such as India offer to global business enterprises.
? Understand the issues and challenges faced by global business firms expanding into emerging markets.
? Understand the entry and exit strategies adopted by firms operating in the international markets.
? Understand the importance of the government’s policy in influencing the business strategy of a firm.
“With limited growth prospects in Vodafone’s core European markets, Sarin No.1 job right now is to convince investors that he has a viable long term growth strategy. And gaining control of a fast growing operator in India is the best opportunity he has to do it” John Delaney, principal analyst at Ovum in January 2007
3
“The announcement is the clear evidence of how we are executing our strategy of developing our presence in the emerging markets. Hutch Essar is an impressive, well run company that will fit well into the Vodafone group.” Arun Sarin, CEO, Vodafone Limited, in February 2007.
“We exit the Indian market as one of the best capitalized telecom companies in the region which will enable us to react swiftly to new opportunities and to accelerate growth in our existing markets.” Canning Fok, Chairman, Hutchison telecom International Limited, in May 2007.
VODAFONE”S FORAY INTO INDIA
On February 11, 2007, the Vodafone Group Plc (Vodafone), a UK-based telecom company, declared that it had finally bagged the fourth largest Indian Mobile Operators, Hutchison Essar Ltd. (HEL). This announcement ended an acquisition battle- probably the most ferociously fought- in the Indian telecom sector. Vodafone bought a 52% stake in HEL for US$11.1 billion from Hutchison telecom international Ltd. (HTIL), 33% stake was still held by the Essar group. The Company was valued at US$19.3 billion. Vodafone won the battle against other major competitors in the fray like Reliance Communications Ventures Ltd.(Reliance), Essar and the Hinduja group.
The deal, the biggest ever in the Indian Telecom industry, came after the Indian government’s(GOI) decision in 2006 to raise the limit on foreign direct investment(FDI) in the telecom sector from 49% to 74%. The deal was expected to infuse much needed FDI into the sector to meet the government’s targeted numbers of 500 million customers by 2010.
4
Industry and Government circles welcomed the deal and said that it would give a big boost to the telecom sector. It would help not just by capital infusion into the sector, but also by bringing on Vodafone’s experience in operating telecom networks. Hel was the fourth biggest player in the Indian Telecom Sector with a subscriber base of 29.2 million in July 2007. HEL had a pan India presence with 13 of the total 28 circles in the country. HEL also had the second highest average revenue per user (ARPU) of Rs.340.15, second only to the market leader Bharti India Ltd. (Bharti Airtel) which had an ARPU of Rs.343.17. India was, in 2007, the fastest growing mobile market in the world unseating China which used to occupy the top slot. The Foreign Investment Promotion Board (FIPB), gave its nod to the acquisition on April 27,2007, after having deferred the decision on the issue of FDI limit allowed in the telecom sector three times…..
VODAFONE
Vodafone, based in UK, was the world’s largest mobile communications company by revenue. It operated under the brand name ‘Vodafone’. The Brand name ‘Vodafone ‘ comes from ‘Voice data fone’, reflecting the company’s wish to provide voice and data services on the mobile phones. Vodafone operated in Europe, the middle East, Asia Pacific and the US….
MOBILE TELEPHONY IN INDIA
The Mobile Telephony revolution started in India when the GOI decided to allow private sector participation in the Indian telecom Sector. The new telecom policy of 1994 envisioned
5
provision of the world class telecom services at least to those who could afford to pay for them. In 1994, licenses were issued by Department of telecommunications (DOT) to the private operators to start mobile services in the four metropolitan cities of Delhi, Mumbai, Chennai and Kolkata.
VODAFONE EYES HUTCHISON ESSAR
In 2006, GOI raised the FDI limit in the telecom sector from 49% to 74%. The government increased the FDI limit in the sector after protracted lobbying by telecom players who were in dire need of capital. OTHER CONTENDERS FOR THE BID
Vodafone wasn’t the only company eyeing HEL, however the fast growth of the Indian mobile market coupled with a relatively low penetration level made it a very lucrative market. So it was no wonder that Vodafone’s announcement started the race for the acquisition of HITL’s stake in HEL among several interested players. Some of the important players in the fray were Reliance, Bharti Airtel, Essar and Orasom….
THE SLUGFEST
Before initiating the bidding process, Vodafone had to clear many regulatory issues. Bharti Airtel, in which Vodafone had a 10% stake, asked it partners to make it clear whether Vodafone wanted to continue its relation with it.
6
Moreover as GOI’s telecom policy allowed only 74% of FDI into the sector, Vodafone’s acquisition of a 67% stake in Hel would lead to the company crossing the limits of FDI allowed as both the players would be operating in the circles.
THE AFTERMATH
On March 22, 2007, Vodafone signed a shareholder agreement with its Indian Partner, Essar, according to which Vodafone would hold a 52% and Essar would continue to hold a 33% stake. Some other minority shareholders, such as Asim Ghosh, Infrastructure Development finance Company (IDFC) and Analjit Singh together would continue to hold the remaining 15% stake in the company.
OUTLOOK Vodafone planned to bring world class branding to India after the ‘Hutch’ brand was replaced by the Vodafone brand name. Vodafone wanted to build up its numbers in the Indian market mostly by expanding into the rural areas. Vodafone also wanted to launch a 3G service in the Indian market as soon as the government declared the 3G policy. Rather than using 3G services as a premium product targeted at upscale segment, Vodafone wanted to take 3G to the rural areas to provide hi speed services to the rural masses.
SWOT ANALYSIS
Vodafone is the largest operator of multiple, multinational wireless networks in the world. Vodafone has reached this position through a process of skillful acquisition of networks in different countries, and strong management skills and operational techniques that have 7
allowed it to build out wireless networks that are highly competitive. Its strengths are enhanced by the fact that it can data services that customer can access using the highly evolved third generation networks that it has rolled out in many markets. This report examines Vodafone’s market position, assesses its strengths and weaknesses, and explains the threats the operator faces, how it must respond to those threats, and where opportunities for future growth will come from.
STRENGTHS • • The main strength of Vodafone within the telecommunications market lies in its brand image and recognition. Vodafone, having established a global presence and having invested highly in marketing a differentiated image by promoting a Vodafone life style, currently enjoys a differentiating advantage that, if exploited properly, can offer a lead in competition. Leadership Position. The presence of Vodafone in numerous countries within Europe as well as in all part of the world enhances this image.
• •
• It allows customers to travel and enjoy easily the services of their home country operator. In the few countries that Vodafone is not physically present (e.g. Norway) it has well?established strategic alliances which allow for a better service of mobile clients. WEAKNESSES • The expansion of Vodafone has been completed at the expense of direct control of its operations. • Centralized control- low flexibility. • High Customer churns rates. • The company grew through a process of acquisitions of national telecommunications companies (e.g. the acquisition of the third biggest Czech mobile phone operator, Cesky mobile) rather than organic growth. This increased its subscribers’ base quickly, offering direct market knowledge and immediate additions of customer bases 8
at the expense of direct effective control of the subsidiaries. At the same time though, it implicitly imposed a centralized operational structure for the group, nominating the UK headquarters as the leading business unit running a much centralized marketing and handset procurement at group level. This has resulted in the neglect of local markets and local differences, allowing market share to be gained by smaller local competitors30. • Due to the highly saturated Western European market this has resulted in an increase in the price elasticity of demand, with consumers becoming continuously price oriented. This has resulted in high customer churn rates reaching the level of 32.8% in the UK compared to O2’s 24%.
OPPORTUNITIES • The telecommunications market, even though highly saturated in some regions offers great potential due to the ageing population and the sophistication of the consumers. It offers great opportunities through a careful market segmentation and exploitation of particular profitable segments. Different strategies should be pursued – simple phones and simplified pricing plans to the ageing population and more updated, sophisticated solutions for younger generations. The expanding boundaries of the market could provide further opportunities by allowing Vodafone to enter more aggressively into fixed?line service and to better enjoy the benefits of its high investment in 3G technology. Moreover the company has undertaken its first steps in establishing strategic alliances to develop customized solutions for end?users: Vodafone recently announced two new partnerships, one with supermarket group ASDA to launch an ASDA?branded mobile service in the UK, and another with electrical retailer DSG International to provide mobile solutions to small businesses32. This could further be enhanced to avoid being a late?entrant in this new method of distribution which offers access to a wide potential customer base.
• •
•
•
THREATS • The European part of Vodafone’s market is characterized by existing high levels of competition. 9
•
Major brands such as O2 and T?Mobile are exploiting the price sensitivity of customers and in this way they are building a stronger image and presence in the market. Indirect competition is also increasing further, through the presence of Skype and other related (not only voice) Internet?based services. This, combined with the upcoming European legislative measures is expected to limit further the tariffs for the network providers imposing further need for price cuts which could harm the bottom line profitability of the company.
•
10
doc_341767125.doc