Split Wide Open

Is Hutch's confrontation with Essar really about Mumbai circle? It may be
true to some extent but there are certain hidden interests that made Mumbai
circle more lucrative for both the companies and the fact is that the impasse
between the two goes beyond the management control of BPL's Mumbai circle.

Let's have a look on the spat between the two over Mumbai circle. It seems
that Essar has been desperately waiting for the July 31 (DoT approval date)
deadline to get over. Essar terminated the agreement as Hutch failed to get
regulatory approval from DoT for the merger, which, according to Essar, was an
important clause of the agreement. DoT later rubbished such claims and said that
its approval is not mandatory for such mergers and the conflict between the two
is completely an internal issue of the two companies. Hutch was even ready to
remove the clause from the agreement but Essar was adamant and offered to refund
the deposit amount of Rs 1,700 crore that Hutch paid to them for Mumbai circle.
The big question is that would Essar agreed to have merged BPL if Hutch had got
the DoT approval. The strained relationship between the two over various issues
for the last one year doesn't indicate so.

Firing a Salvo

Essar currently has 33% stake in Hutch Essar and Hutchinson telecom
International holds the remaining stake through direct and indirect holding.
Hutchinson telecom international sold its 19.3% stake to Egyptian service
provider Orascom for $1.3 billion, by virtue of which Orascom has around 10%
stake in Hutch-Essar. Adding to the resentment, Hutchinson International later
bought Hinduja TMT's 5.11% stake in Hutch-Essar for $450 million. These two
developments were enough to upset Ruia's.

Ruia's were nither consulted nor informed about these developments. ­Essar
later went ahead and wrote to PMO, finance ministry, and communications minister
for reversal of the deal since it did not adhere to the telecom laws of the
land. According to Ruias, Orascom is a dominant player in neighboring
countries-Pakistan and Bangladesh and is a direct threat to country's
security. The ministries later gave clean chit to Orascom. This was followed by
Hinduja TMT's 5.11% stake sell. Ruias were keen to buy this stake but failed
to do so and Hutchinson International managed to bag the deal, through which
HTIL's direct stake rose to 48%.

The exasperated Ruias, who bought BPL Mumbai, BPL Cellular, and Spacetel
circles refused to merge BPL Mumbai circle with Hutch citing the reason of DoT
approval. It has recently announced the investment of $21 million to ramp up BPL
Mobile business in Mumbai.

Essar Hutch Game Plan

But the reason for turning down the Hutch's offer can't be these silly
reasons. Essar is very well aware of the fact that Hutch is keen on buying
Mumbai circle that already has around 1.5 million subscribers to raise its
valuation, which would eventually help Hutch for IPO in India. Secondly, if they
sell BPL's Mumbai circle to Hutch, Essar's stake will further get diluted
and Essar would virtually have no say in any management decision.

On the contrary, if Essar sells the BPL Mumbai to third party, it would get
better valuation. Idea cellular, Maxis and Reliance telecom have already shown
their desire to expand in metros and they won't mind paying premium to enter
Mumbai circle that already has a subscriber base of 1.5 million. As per
estimates, if the deal happens with any third party service provider, it would
be in excess of $ one billion.

But what options Hutch has to get Mumbai circle from Essar? It is quite clear
that Essar would not sell BPL Mumbai to Hutch at the price that Hutch offered.
Secondly, Essar would like to consolidate its holding in JV. The only option
that Hutch has is to raise Essar's stake by selling its own equity and revise
its offer. It could be done by offering Orascom's 10% stake to Essar or if
Asim Ghosh and Anlajit Singh agrees to sell their 19% indirect holding in the
company to Essar. In all, Hutch will have to pay hefty price to bag BPL's
Mumbai circle from Essar.

Emerging Scene

Here are the Stakes Essar Looking for 1. Raised equity in Hutch-Essar; possibly buying Orascom's stake 2. Better valuation for Mumbai circle 3. Orascom's exit from the Indian JV Hurdles for Hutch 1. Can't sell Orascom's stake to Essar due to a two-year stand still period between HTIL and Orascom wherein neither party can sell any of its stake in Hutchison Telecom. 2. Orascom and Essar don't share good relations 3. Other shareholders-Asim Ghosh and Analajit Singh might not dilute their stake for Essar.

Orascom's Take

All this would not be a cakewalk for Hutch. Reason being, Orascom is keen to
expand its footprint across the globe by entering into bigger circles and it
would not get a better way to enter India. Also Orascom still has an option to
further buy 4% stake in Hutchinson telecom International, which would eventually
end up in more controlling stake in Hutch Essar. India is a key market for all
stakeholders in Hutchinson, as 45% of Hutchinson International revenues come
from Indian market itself.

Also, Orascom doesn't seem very comfortable with Essar, as it opposed its
entry in the country. Orascom, in its annual report and with analysts said, “With
all respect to the Indian partner, who along with most ­Indian local partners
have been always trying to intervene when foreign investors try to come in and
invest or exit even. So, we are used to that and I would say it is not an
unusual situation. But we are, to say the least, not bothered by that.”

Moreover, the agreement between Orascom and Hutchinson clearly states that
there is a standstill period of two years in which, apart from some exceptions,
neither party will be able to sell any of its stake in Hutchison Telecom.

Hence, forget about Orascom's stake selling to Essar, Hutch will eventually
have problems managing both its partners, if they continue to have their
interests in Indian market.

Second option of selling its indirect holding won't solve any purpose.
Firstly, both indirect entities would not sell their stake in the booming
telecom market and secondly even if they sell, Orascom would still be present,
which is actually the bone of contention between Hutch and Essar. Above all,
Hutch would also not like Orascom to quit as the combined geographic footprint
of Orascom and Hutchinson International provides synergy to their operations.

The battle between Hutch and Essar has moved to court and it's now over to
an arbitration tribunal to resolve the conflict between the two. The tribunal is
expected to be set up by September 15. The court said to resolve the issue
through an arbitration process within four weeks of the tribunal being set up.
It has restrained Essar from selling or transferring any of their shares to a
third party for a period of four weeks The tribunal will have three arbitrators
- one each for Hutch and Essar, and another neutral representative. Both the
parties also have the option to resolve the matter amicably.

But whatever be the fate of the dispute, it's very much clear that the
relationship between Hutch and Essar has gone sour and it's very unlikely the
two would come out with a long-term solution of the differences and bury the
hatchet anytime soon.

Rahul Gupta