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Bolot Balbakov Clemens Hohner Philipp Weber
Summer Term 08
The Hutchison Essar Acquisition by Vodafone Presentation within the course International Strategic Management at the Chair of International Management Ingolstadt, May 26th 2008 Prof. Dr. Michael Kutschker Chair of International Management
Agenda 1.
Vodafone
2.
Hutchison
3.
Indian mobile phone industry
Main developments
Importance for the economy
Major players
Trends
4. Options & strategy of Vodafone in India 5. Role of the Indian government 6. Major opportunities & threats of the investment in India 7. Challenges ahead after the deal 8. Development until today 9. Discussion ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 2
Prof. Dr. Michael Kutschker Chair of International Management
1.
Vodafone •
1950:
Racal Electronics Plc.
•
1991:
Vodafone Group
•
1996:
various acquisitions in the UK
•
1999:
expanded overseas (Air Touch Communications, Inc. USA) 35% share of Mannesmann AG
•
2000:
merged with US Bell Atlantic Corp. bid purchase for Mannesmann AG worldwide expansion except some mature markets
•
2005:
entered Indian market (acquisition of 10% in Bharti Ventures Ltd.)
•
2007:
11.02.: merger with Hutchison Essar Ltd.
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 3
Prof. Dr. Michael Kutschker Chair of International Management
1.
Vodafone
Source: Vodafone ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 4
Prof. Dr. Michael Kutschker Chair of International Management
2.
Hutchison Essar Ltd. (HEL)
Joint Venture between HTIL and Essar •
1994:
cellular license for Mumbai circle JV between HTIL & Max India Ltd. = ‚Hutch‘
•
1998:
HTIL increased stake
•
2005:
consolidation business operations by HEL under ‚Hutchison Max Telecom Ltd.‘ Essar Spacetel applied for licenses in 7 circles HEL bought out Essar Spacetel ‚Hutchison Essar Ltd.‘
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 5
Prof. Dr. Michael Kutschker Chair of International Management
2.
Hutchison Essar Ltd. (end 2006)
•
revenue (end 2005):
US$164.4 million
•
customers:
23 million
•
market share:
19%
•
technology:
GSM
Source: Vodafone
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 6
Prof. Dr. Michael Kutschker Chair of International Management
3.
Indian mobile phone industry Main developments:
•
1994:
new telecom policy for 4 metropolitan cities
•
1995:
mobile licenses for 19 more circles
•
1999:
National Telecom Policy GSM technology
•
2000:
consolidation: creation of IDEA Cellular Ltd.
•
2001:
private participation in NLD & ILD services
•
2004:
universal service telecom license # mobile phone users (44.9 million) > # landline users
•
2007:
introduction 3 G policy
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 7
Prof. Dr. Michael Kutschker Chair of International Management
3.
Indian mobile phone industry Importance for the Indian economy:
Composition GDP 2006 public services, 14.0%
agriculture, 18.5%
banking, insurance, real estate, 13.9% industry, 15.5%
mining, 2.2%
construction industry, 6.9%
trade, hotels, transport, communication, 27.0% energy, gas, water, 2.0%
Source: BFAI
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 8
Prof. Dr. Michael Kutschker Chair of International Management
3.
Indian mobile phone industry Importance for the Indian economy:
economic growth 2006 14.6%
10.8%
10.6% 7.9%
7.5% 5.2%
0.8%
agriculture
mining
energy, gas, water
construction industry
banking, insurance, real estate
trade, hotels, transport, communication
social sector
Source: BFAI
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 9
Prof. Dr. Michael Kutschker Chair of International Management
Indian mobile phone industry Major players:
List of Cellular Service Providers in India 23
23 21
20 16
7
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 10
2
ID Es EA co rt Te le co Air c m m el un ica tio n Sp ice M C TN om L m un ica tio ns
Hu tc h
BS N L Te le se rv ice s Ta ta
Re lia nc e
Bh ar ti
Ai rte l
3
2
1
1
HF Sh C L ya m Te le lin k
8
BP L
# circle
3.
Prof. Dr. Michael Kutschker Chair of International Management
1
3.
Indian mobile phone industry Major players:
Market Share of Mobile Operators by Subscribers in India
IDEA Cellular, 10% Bharti Airtel, 25%
Reliance Communications, 20%
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 11
Hutchison Essar, 19%
BSNL & MTNL, 22%
Prof. Dr. Michael Kutschker Chair of International Management
3.
Indian mobile phone industry Trends:
Source: Vodafone
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 12
Prof. Dr. Michael Kutschker Chair of International Management
4.
Options & strategy of Vodafone in India Own venture
Minority Stake
Options of Vodafone Acquisition/Merger
Joint Venture
General Comparison: Acquisition vs. New venture Dimension of utility
New venture
Acquisition
1. 2. 3. 4. 5. 6. 7. 8.
– – – – + + + +
+ + + + – – – –
Economies of scale Economies of scope/local resources Saving of time Aspects of competition Strategic view Structural view Cultural view Capital costs and risks
Source: following Kutschker (1992), p. 513
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 13
Prof. Dr. Michael Kutschker Chair of International Management
4.
Options & strategy of Vodafone in India
The Indian Mobile market One of the biggest in the world
• • • •
Fast growth
High competition
Requirement to enter in the market: licenses
Importance of economies of scale Necessity of investments in the whole country Necessity of investments in a very short time Importance of strong market position
=> In 2006/2007 an acquisition seems to be the better strategy to enter the Indian Mobile Market ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 14
Prof. Dr. Michael Kutschker Chair of International Management
4.
Options & strategy of Vodafone in India
The Indian Telecom market Wholly owned subsidiary or joint venture? In general: wholly owned company better choice • • • •
No complications with the partner Complete own strategic control Better integration in the worldwide cooperation Complete implementation of an own brand strategy
However: Indian law allows just a majority stake ⇒ ⇒
FDI limit in the telecom sector = 74% no complete acquisition possible
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 15
Prof. Dr. Michael Kutschker Chair of International Management
Options & strategy of Vodafone in India
4.
Vodafone and HTIL November 2006: HTIL, major stake owner in the HEL, declared its stake was up for sale in November 2006 Selling reasons HTIL:
Buying reasons Vodafone:
• •
• HEL = one of the most profitable telecom companies in India • Second highest ARPU • Licenses in almost all lucrative telecom circles • High brand recall for Hutch • Company’s use of the latest technology
• •
Falling ARPU Concentration on other markets Negative experience with Indian government Difficult relations to the partner Essar
The deal: • • • • •
February 2007: Vodafone the highest bidder Price: US$11.1 /10.9 billion – in cash India: single biggest foreign investment in its history Vodafone: third biggest deal ever HTIL: nearly 700% returns on its investments in India
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 16
Prof. Dr. Michael Kutschker Chair of International Management
5.
Role of the Indian Government
Reserve Bank of India (RBI)
Main difficulties:
Foreign Investment Promotion Board (FIPB)
• Price regulations
Telecom Regulatory Authorithy of India (TRAI) Government of India (GoI)
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 17
• Maximum amount of foreign investments (74%)
Prof. Dr. Michael Kutschker Chair of International Management
6.
Major opportunities & threats of the investment in India
Opportunities • Size of the market • Biggest democracy of the world • Economic growth and growth of demand • well educated specialists • possibility to profit from economic core centers
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 18
Threats • Governmental regulations • Slowly bureaucracy • Lack of infrastructure • High level of competition ⇒ Lower profitability • Aspects of culture ⇒ Management of cooperation • Danger of joint ventures ⇒ Technology transfer
Prof. Dr. Michael Kutschker Chair of International Management
6.
Major opportunities & threats of the investment in India
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 19
Prof. Dr. Michael Kutschker Chair of International Management
7.
Challenges ahead after the deal Expandingdistribution distribution and Expanding and network networkcoverage coverage
Rebranding Rebranding
Lowering the total cost of network ownership
Driving a customer focused approach
Growing market share
Driving value growth in India
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 20
Prof. Dr. Michael Kutschker Chair of International Management
Challenges ahead after the deal
7.
Expanding distribution and network coverage Hutch Essar management
Distribution
• No subsidy, low cost to connect
• 1,800 Hutch branded shops • Building distribution channels in new coverage areas
Vodafone value add • Invest in existing model • Accelerate distribution roll-out in line with network roll-out plans • Retail experience (7,000 stores)
• Increase investment to build
Network
• Network performance in 16 circles
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 21
market share • Infrastructure sharing MOU with Bharti to enable industry leading cost structure
Prof. Dr. Michael Kutschker Chair of International Management
7.
Challenges ahead after the deal Rebranding
Hutchison Essar Ltd.
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 22
Vodafone Essar
Prof. Dr. Michael Kutschker Chair of International Management
7.
Challenges ahead after the deal
Vodafone’ s
The new reality of the mobile industry
problems
solutions
• Intensive competition by existing and new players
Bharti Airtel, Reliance, others
MOU with contenders
• Significant price erosion
Low-cost strategies
Accelerate rollout and reduce network cost
• Customers have bigger choice in communications
Cheap cell phones
Low-cost handsets
• Emerging markets delivering significant growth • Continued significant regulatory pressure
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 23
Expansion Termination rates, roaming
Global partnerships
Prof. Dr. Michael Kutschker Chair of International Management
8.
Development until up today Vodafone's market share has grown from 16.1% to 17.4% in 2007 Bharti leads with 23.9%, up from 21.4%
25 20 15 2007 2008
10 5 0
Bharti Airtel
Vodafone Essar Sources: Investors Business Journal
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 24
Prof. Dr. Michael Kutschker Chair of International Management
8.
Questions
Any questions? ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 25
Prof. Dr. Michael Kutschker Chair of International Management
9.
Discussion
Discuss options of market-entry of Vodafone in India
Capital- and Managementinput in home market
Export Licensing Franchising Joint Venture Acquisition or New venture Capital- and Managementinput in foreign market
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 26
Prof. Dr. Michael Kutschker Chair of International Management
Summer Term 08
The Hutchison Essar Acquisition by Vodafone Presentation within the course International Strategic Management at the Chair of International Management Ingolstadt, May 26th 2008 Prof. Dr. Michael Kutschker Chair of International Management
Agenda 1.
Vodafone
2.
Hutchison
3.
Indian mobile phone industry
Main developments
Importance for the economy
Major players
Trends
4. Options & strategy of Vodafone in India 5. Role of the Indian government 6. Major opportunities & threats of the investment in India 7. Challenges ahead after the deal 8. Development until today 9. Discussion ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 2
Prof. Dr. Michael Kutschker Chair of International Management
1.
Vodafone •
1950:
Racal Electronics Plc.
•
1991:
Vodafone Group
•
1996:
various acquisitions in the UK
•
1999:
expanded overseas (Air Touch Communications, Inc. USA) 35% share of Mannesmann AG
•
2000:
merged with US Bell Atlantic Corp. bid purchase for Mannesmann AG worldwide expansion except some mature markets
•
2005:
entered Indian market (acquisition of 10% in Bharti Ventures Ltd.)
•
2007:
11.02.: merger with Hutchison Essar Ltd.
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 3
Prof. Dr. Michael Kutschker Chair of International Management
1.
Vodafone
Source: Vodafone ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 4
Prof. Dr. Michael Kutschker Chair of International Management
2.
Hutchison Essar Ltd. (HEL)
Joint Venture between HTIL and Essar •
1994:
cellular license for Mumbai circle JV between HTIL & Max India Ltd. = ‚Hutch‘
•
1998:
HTIL increased stake
•
2005:
consolidation business operations by HEL under ‚Hutchison Max Telecom Ltd.‘ Essar Spacetel applied for licenses in 7 circles HEL bought out Essar Spacetel ‚Hutchison Essar Ltd.‘
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 5
Prof. Dr. Michael Kutschker Chair of International Management
2.
Hutchison Essar Ltd. (end 2006)
•
revenue (end 2005):
US$164.4 million
•
customers:
23 million
•
market share:
19%
•
technology:
GSM
Source: Vodafone
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 6
Prof. Dr. Michael Kutschker Chair of International Management
3.
Indian mobile phone industry Main developments:
•
1994:
new telecom policy for 4 metropolitan cities
•
1995:
mobile licenses for 19 more circles
•
1999:
National Telecom Policy GSM technology
•
2000:
consolidation: creation of IDEA Cellular Ltd.
•
2001:
private participation in NLD & ILD services
•
2004:
universal service telecom license # mobile phone users (44.9 million) > # landline users
•
2007:
introduction 3 G policy
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 7
Prof. Dr. Michael Kutschker Chair of International Management
3.
Indian mobile phone industry Importance for the Indian economy:
Composition GDP 2006 public services, 14.0%
agriculture, 18.5%
banking, insurance, real estate, 13.9% industry, 15.5%
mining, 2.2%
construction industry, 6.9%
trade, hotels, transport, communication, 27.0% energy, gas, water, 2.0%
Source: BFAI
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 8
Prof. Dr. Michael Kutschker Chair of International Management
3.
Indian mobile phone industry Importance for the Indian economy:
economic growth 2006 14.6%
10.8%
10.6% 7.9%
7.5% 5.2%
0.8%
agriculture
mining
energy, gas, water
construction industry
banking, insurance, real estate
trade, hotels, transport, communication
social sector
Source: BFAI
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 9
Prof. Dr. Michael Kutschker Chair of International Management
Indian mobile phone industry Major players:
List of Cellular Service Providers in India 23
23 21
20 16
7
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 10
2
ID Es EA co rt Te le co Air c m m el un ica tio n Sp ice M C TN om L m un ica tio ns
Hu tc h
BS N L Te le se rv ice s Ta ta
Re lia nc e
Bh ar ti
Ai rte l
3
2
1
1
HF Sh C L ya m Te le lin k
8
BP L
# circle
3.
Prof. Dr. Michael Kutschker Chair of International Management
1
3.
Indian mobile phone industry Major players:
Market Share of Mobile Operators by Subscribers in India
IDEA Cellular, 10% Bharti Airtel, 25%
Reliance Communications, 20%
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 11
Hutchison Essar, 19%
BSNL & MTNL, 22%
Prof. Dr. Michael Kutschker Chair of International Management
3.
Indian mobile phone industry Trends:
Source: Vodafone
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 12
Prof. Dr. Michael Kutschker Chair of International Management
4.
Options & strategy of Vodafone in India Own venture
Minority Stake
Options of Vodafone Acquisition/Merger
Joint Venture
General Comparison: Acquisition vs. New venture Dimension of utility
New venture
Acquisition
1. 2. 3. 4. 5. 6. 7. 8.
– – – – + + + +
+ + + + – – – –
Economies of scale Economies of scope/local resources Saving of time Aspects of competition Strategic view Structural view Cultural view Capital costs and risks
Source: following Kutschker (1992), p. 513
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 13
Prof. Dr. Michael Kutschker Chair of International Management
4.
Options & strategy of Vodafone in India
The Indian Mobile market One of the biggest in the world
• • • •
Fast growth
High competition
Requirement to enter in the market: licenses
Importance of economies of scale Necessity of investments in the whole country Necessity of investments in a very short time Importance of strong market position
=> In 2006/2007 an acquisition seems to be the better strategy to enter the Indian Mobile Market ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 14
Prof. Dr. Michael Kutschker Chair of International Management
4.
Options & strategy of Vodafone in India
The Indian Telecom market Wholly owned subsidiary or joint venture? In general: wholly owned company better choice • • • •
No complications with the partner Complete own strategic control Better integration in the worldwide cooperation Complete implementation of an own brand strategy
However: Indian law allows just a majority stake ⇒ ⇒
FDI limit in the telecom sector = 74% no complete acquisition possible
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 15
Prof. Dr. Michael Kutschker Chair of International Management
Options & strategy of Vodafone in India
4.
Vodafone and HTIL November 2006: HTIL, major stake owner in the HEL, declared its stake was up for sale in November 2006 Selling reasons HTIL:
Buying reasons Vodafone:
• •
• HEL = one of the most profitable telecom companies in India • Second highest ARPU • Licenses in almost all lucrative telecom circles • High brand recall for Hutch • Company’s use of the latest technology
• •
Falling ARPU Concentration on other markets Negative experience with Indian government Difficult relations to the partner Essar
The deal: • • • • •
February 2007: Vodafone the highest bidder Price: US$11.1 /10.9 billion – in cash India: single biggest foreign investment in its history Vodafone: third biggest deal ever HTIL: nearly 700% returns on its investments in India
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 16
Prof. Dr. Michael Kutschker Chair of International Management
5.
Role of the Indian Government
Reserve Bank of India (RBI)
Main difficulties:
Foreign Investment Promotion Board (FIPB)
• Price regulations
Telecom Regulatory Authorithy of India (TRAI) Government of India (GoI)
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 17
• Maximum amount of foreign investments (74%)
Prof. Dr. Michael Kutschker Chair of International Management
6.
Major opportunities & threats of the investment in India
Opportunities • Size of the market • Biggest democracy of the world • Economic growth and growth of demand • well educated specialists • possibility to profit from economic core centers
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 18
Threats • Governmental regulations • Slowly bureaucracy • Lack of infrastructure • High level of competition ⇒ Lower profitability • Aspects of culture ⇒ Management of cooperation • Danger of joint ventures ⇒ Technology transfer
Prof. Dr. Michael Kutschker Chair of International Management
6.
Major opportunities & threats of the investment in India
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 19
Prof. Dr. Michael Kutschker Chair of International Management
7.
Challenges ahead after the deal Expandingdistribution distribution and Expanding and network networkcoverage coverage
Rebranding Rebranding
Lowering the total cost of network ownership
Driving a customer focused approach
Growing market share
Driving value growth in India
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 20
Prof. Dr. Michael Kutschker Chair of International Management
Challenges ahead after the deal
7.
Expanding distribution and network coverage Hutch Essar management
Distribution
• No subsidy, low cost to connect
• 1,800 Hutch branded shops • Building distribution channels in new coverage areas
Vodafone value add • Invest in existing model • Accelerate distribution roll-out in line with network roll-out plans • Retail experience (7,000 stores)
• Increase investment to build
Network
• Network performance in 16 circles
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 21
market share • Infrastructure sharing MOU with Bharti to enable industry leading cost structure
Prof. Dr. Michael Kutschker Chair of International Management
7.
Challenges ahead after the deal Rebranding
Hutchison Essar Ltd.
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 22
Vodafone Essar
Prof. Dr. Michael Kutschker Chair of International Management
7.
Challenges ahead after the deal
Vodafone’ s
The new reality of the mobile industry
problems
solutions
• Intensive competition by existing and new players
Bharti Airtel, Reliance, others
MOU with contenders
• Significant price erosion
Low-cost strategies
Accelerate rollout and reduce network cost
• Customers have bigger choice in communications
Cheap cell phones
Low-cost handsets
• Emerging markets delivering significant growth • Continued significant regulatory pressure
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 23
Expansion Termination rates, roaming
Global partnerships
Prof. Dr. Michael Kutschker Chair of International Management
8.
Development until up today Vodafone's market share has grown from 16.1% to 17.4% in 2007 Bharti leads with 23.9%, up from 21.4%
25 20 15 2007 2008
10 5 0
Bharti Airtel
Vodafone Essar Sources: Investors Business Journal
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 24
Prof. Dr. Michael Kutschker Chair of International Management
8.
Questions
Any questions? ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 25
Prof. Dr. Michael Kutschker Chair of International Management
9.
Discussion
Discuss options of market-entry of Vodafone in India
Capital- and Managementinput in home market
Export Licensing Franchising Joint Venture Acquisition or New venture Capital- and Managementinput in foreign market
ISM | Mergers & Acquisitions Ingolstadt, May 26th 2008 26
Prof. Dr. Michael Kutschker Chair of International Management
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