ASSIGNMENT ON ACQUISIOTION OF HUTCH ESSAR BY VODAFONE

WHAT IS MERGER & ACQUISITION? MERGER

Mergers and acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.

ACQUISITION
An acquisition or takeover is the purchase of one business or company by another company or other business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on a public stock market. An additional dimension or categorization consists of whether an acquisition is friendly or hostile. Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome. "Serial acquirers" appear to be more successful with M&A than companies who only make an acquisition occasionally. Mergers and acquisitions are strategic decisions taken for maximisation of a company's growth by enhancing its production and marketing operations. They are being used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional businesses in order to gain strength, expand the customer base, cut competition or enter into a new market or product segment.

Advantages of Mergers & Acquisitions

The most common motives and advantages of mergers and acquisitions are: Accelerating a company's growth, particularly when its internal growth is constrained due to paucity of resources. Internal growth requires that a company should develop its operating facilities- manufacturing, research, marketing, etc. But, lack or inadequacy of resources and time needed for internal development may constrain a company's pace of growth. Hence, a company can acquire production facilities as well as other resources from outside through mergers and acquisitions. Specially, for entering in new products/markets, the company may lack technical skills and may require special marketing skills and a wide distribution network to access different segments of markets. The company can acquire existing company or companies with requisite infrastructure and skills and grow quickly. Enhancing profitability because a combination of two or more companies may result in more than average profitability due to cost reduction and efficient utilization of resources. This may happen because of: Economies of scale: - arise when increase in the volume of production leads to a reduction in the cost of production per unit. This is because, with merger, fixed costs are distributed over a large volume of production causing the unit cost of production to decline. Economies of scale may also arise from other indivisibilities such as production facilities, management functions and management resources and systems. This is because a given function, facility or resource is utilized for a large scale of operations by the combined firm. Operating economies: - arise because, a combination of two or more firms may result in cost reduction due to operating economies. In other words, a combined firm may avoid or reduce over-lapping functions and consolidate its management functions such as manufacturing, marketing, R&D and thus reduce operating costs. For example, a combined firm may eliminate duplicate channels of distribution, or crate a centralized training centre, or introduce an integrated planning and control system. Synergy:- implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. But apart from operating economies, synergy may also arise from enhanced managerial

capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarities of resources and skills and a widened horizon of opportunities. Diversifying the risks of the company, particularly when it acquires those businesses whose income streams are not correlated. Diversification implies growth through the combination of firms in unrelated businesses. It results in reduction of total risks through substantial reduction of cyclicality of operations. The combination of management and other systems strengthen the capacity of the combined firm to withstand the severity of the unforeseen economic factors which could otherwise endanger the survival of the individual companies. A merger may result in financial synergy and benefits for the firm in many ways: By eliminating financial constraints By enhancing debt capacity. This is because a merger of two companies can bring stability of cash flows which in turn reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt By lowering the financial costs. This is because due to financial stability, the merged firm is able to borrow at a lower rate of interest. Limiting the severity of competition by increasing the company's market power. A merger can increase the market share of the merged firm. This improves the profitability of the firm due to economies of scale. The bargaining power of the firm vis--vis labour, suppliers and buyers is also enhanced. The merged firm can exploit technological breakthroughs against obsolescence and price wars.

TYPES OF MERGERS
Horizontal merger: - it is a combination of two or more firms in the same area of business. For example, combining of two book publishers or two luggage manufacturing companies to gain dominant market share. Vertical merger:- is a combination of two or more firms involved in different stages of production or distribution of the same product. For example joining of a TV manufacturing (assembling) company and a TV marketing company or joining of a spinning company and a weaving company Vertical merger may take the form of forward or backward merger. When a company combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger.

 Conglomerate merger: - is a combination of firms engaged in unrelated lines of business activity. For example, merging of different businesses like manufacturing of cement products, fertilizer products, electronic products, insurance investment and advertising agencies. L&T and Voltas Ltd are examples of such mergers.

VODAFONE ACQUIRES CONTROL OF HUTCH ESSAR IN INDIA ABOUT VODAFONE

Vodafone, based in the 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, Africa, 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 provision of 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 Calcutta (now Kolkata)...

ABOUT HUTCH ESSAR

Hutch Essar was a leading Indian telecommunications mobile operator with 23.3 million customers at 31 December 2006, representing a 16.4% national market share. Hutch Essar operates in 16 circles and has licences in an additional six circles. In the year to 31 December 2005, Hutch Essar reported revenue of US$1,282 million, EBITDA of US$415 million, and operating profit of US$313 million. In the six months to 30 June 2006, Hutch Essar reported revenue of US$908 million, EBITDA of US$297 million, and operating profit of US$226 million. Up until January 2006, Hutch Essar had licences in 13 circles, of which nine have 900 MHz spectrum. In January 2006, Hutch Essar acquired BPL, thereby adding three circles, each operating with 900 MHz spectrum. In October 2006, Hutch Essar acquired Spacetel, adding six further licences, with operations planned to be launched during 2007.The results of Hutch Essar are prepared in accordance with Hong Kong Financial Reporting Standards which may differ in material respects from the accounting principles applied by Vodafone.

Abstract of case
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 percent stake in the Indian telecom company, Hutchison Essar Ltd (Hutchison Essar), through a deal with the Hong Kong-based Hutchison Telecommunication International Ltd. (HTIL). It was the biggest deal in the Indian telecom market. Vodafone's main motive in going in for the deal was its strategy of expanding into emerging and high growth markets like India. In 2007, India had 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 companies. Though Hutchison Essar was one of the established players in this market, HTIL had exited India as the urban markets in the country had become saturated. Future expansion would have had 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 had to face many obstructions in clinching the deal - initial opposition for the Indian partner 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 it get a massive footprint in one of the most competitive telecommunication markets in the world.

The key highlights are:

Vodafone announces it has agreed to acquire companies that control a 67% interest in Hutch Essar from Hutchison Telecom International Limited (HTIL) for a cash consideration of US$11.1 billion (5.7 billion) Vodafone will assume net debt of approximately US$2.0 billion (1.0 billion) The transaction implies an enterprise value of US$18.8 billion (9.6 billion) for Hutch Essar The acquisition meets Vodafones stated financial investment criteria Infrastructure sharing MOU with Bharti

Whilst Hutch Essar and Bharti will continue to compete independently, Vodafone and Bharti have entered into a MOU relating to a comprehensive range of infrastructure sharing options in India between Hutch Essar and Bharti

Infrastructure sharing is expected to reduce the total cost of delivering telecommunication services, especially in rural areas, enabling both parties to expand network coverage more quickly and to offer more affordable services to a broader base of the Indian population

OPERATIONAL PLAN FOR HUTCH ESSAR

Vodafone execute an operational plan to build on the strengths of Hutch Essar in order to capture the Indian telecom growth opportunity.

Key strategic objectives

In the context of penetration that is expected to exceed 40% by FY2012, Vodafone is targeting a 20-25% market share within the same timeframe. The operational plan focuses on the following objectives: Expanding distribution and network coverage Lowering the total cost of network ownership Growing market share Driving a customer focused approach Site sharing The MOU outlines a process for achieving a more extensive level of site sharing and covers both new and existing sites. Around one third of Hutch Essars current sites are already shared with other Indian mobile operators and Vodafone is planning that around two thirds of total sites will be shared in the longer term. The MOU recognises the potential for achieving further efficiencies by sharing infrastructure with other mobile operators in India. The MOU envisages the potential, subject to regulatory approval and commercial development, to extend the agreement to sharing of active infrastructure such as radio access network and access transmission.

Financial assumptions
As part of the operational plan, Vodafone expects to increase capital investment, particularly in the first two to three years, with apex as a percentage of revenues

reducing to the low teens by FY2012. The operational plan results in an FY2007-12 EBITDA CAGR percentage around the mid-30s. Cash tax rates of 11-14% for FY2008-12 are expected due to various tax incentives and will trend towards approximately 30-34% in the long term. As a result of this operational plan, the transaction meets Vodafones stated financial investment criteria, with a ROIC exceeding the local risk adjusted cost of capital in the fifth year and an IRR of around 14%.

PRINCIPAL BENEFITS
The principal benefits to Vodafone of the transaction are: Accelerates Vodafones move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market India is the worlds 2nd most populated country with over 1.1 billion inhabitants India is the fastest growing major mobile market in the world, with around 6.5 million monthly net adds in the last quarter India benefits from strong economic fundamentals with expected real GDP growth in high single digits Hutch Essar delivers a strong existing platform in India nationwide presence with recent expansion to 22 out of 23 licence areas (circles) 23.3 million customers as at 31 December 2006, equivalent to a 16.4% nationwide market share year-on-year revenue growth of 51% and an EBITDA margin of 33% in the six months to 30 June 2006 experienced and highly respected management team Driving additional value in Hutch Essar accelerated network investment driving penetration and market share growth infrastructure sharing MOU with Bharti plans to reduce substantially network opex and capex potential for Hutch Essar to bring Vodafones innovative products and services to the Indian market, including Vodafones focus on total communication solutions for customers

Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices Increases Vodafones presence in higher growth emerging markets proportion of Group statutory EBITDA from the EMAPA region expected to increase from below 20% in the financial year ending 31 March 2007 (FY2007) to over a third by FY2012

FINANCIAL IMPACT ON VODAFONE

The transaction enhances Vodafones growth profile on a pro forma statutory basis, with Vodafones revenue and EBITDA CAGR increasing by around one and a half percentage points over the three year period to 31 March 2010. The transaction is expected to be broadly neutral to adjusted earnings per share in the first year post acquisition and accretive thereafter excluding the impact of intangible asset amortisation for the transaction. Including this impact, the transaction is expected to be approximately seven percent dilutive to adjusted earnings per share in the first year post acquisition and neutral by the fifth year. The Board remains committed to its longer term targeted dividend payout of 60% of adjusted earnings per share. Furthermore, the Board expects the dividend per share to be at least maintained in the short term. The acquisition of HTILs controlling interest in Hutch Essar will be financed through debt and existing cash reserves and Vodafone expects pro forma net debt of around 22.8-23.3 billion3 at 31 March 2007 as a result of this transaction.

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 (Ghosh), Infrastructure development finance company (IDFC) and Analjit Singh together would continue to hold the remaining 15 per cent stake in the company. 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 the 3G services as a premium product targeted at upscale segment, Vodafone wanted to take 3G to the rural areas to provide hi-speed data services to the rural masses.