Anil in exit mode?

HONG KONG/MUMBAI/KOLKATA: Anil Sarin of Vodafone is reportedly in Hong Kong. So is Ravi Ruia of Essar. Missing from the picture is the other widely-touted frontrunner for the takeover of Hutchison Essar - Anil Ambani.

Is the man who started the whole media buzz on the takeover of India’s fourth largest mobile company now having second thoughts?

This is the question everyone is asking as the global bidding war for Hutchison Essar, the Indian business of the Hong Kong-based Hutchison Telecom International (HTIL), moved decisively into the next phase on Wednesday as Vodafone CEO Arun Sarin and Essar vice-chairman Ravi Ruia flew into Hong Kong for crucial talks, sources in the telecom industry said.

The problem, clearly, is the sticker price. On Wednesday, a Hutchison Telecom spokesperson confirmed media reports that the company would only entertain offers “well in excess of $14 billion”, which effectively sets a base price for the deal.

The Financial Times had reported from London that HTIL had “dismissed” a $13.5 billion offer for Hutchison Essar, made last week by Malaysian telecom giant Maxis Communications and US private equity firm Texas Pacific Group.

But if HTIL’s 67% stake has to be priced upwards of $ 14 billion, the whole company will cost the buyer something like $20-21 billion. Anil Ambani cannot obviously buy only the HTIL stake since the Ruias will not play second fiddle.

As the asking price for Anil Ambani goes up, the wait-and-watch game of Reliance Communications (RCom) cannot be sustained any longer. Anil Ambani, say observers,  will have to walk away.

Sources close to RCom said  that though the group is not short on cash, any all-cash offer of $ 20 billion or more for a 100% acquisition of Hutchison Essar will not be prudent in terms of enterprise value.

This is especially so since RCom could anyway be close to the No 1 slot looking at its current rate of subscriber growth.

“Where’s the value-add that Hutchison Essar can bring to the table for Reliance?” asks one insider. So if the hands controlling the fourth largest mobile telephony player are slated to change, then it’s for the foreign players with practically no presence in the country to make a big enough bid for Hutch.

On the other hand, strategically it makes sense for an Anil Ambani to raise the stakes for all new  bidders so that entry to the Indian market becomes an expensive proposition for the new entrant.

Many analysts also point out that RCom will gain little by committing huge sums for an acquisition. “It will not make sense to eliminate a rival by swallowing it, as the move clearly does not give the acquirer any pricing power or any clout with telecom equipment suppliers,” the analyst said.

What this means is that RCom may now be preparing the ground for a quiet withdrawal, having made the entry prohibitively expensive for whoever ultimately buys Hutch. A high price-entry, however, suits the Ruias, since this will give them a high exit bonus.

Ravi Ruia is currently in Hongkong accompanied by investment bankers, including those from JM Morgan Stanley and Standard Chartered. The Essars, who as existing partners with a 33% stake in the Indian joint venture have the first right of refusal, are reported to be keen to “buy out” HTIL’s 67% stake in Hutchison Essar. As partners of HTIL, only they have the necessary clout to bring down HTIL’s asking price.

Sarin’s reported arrival in Hongkong could not be independently confirmed. An HTIL spokesperson did not return calls seeking confirmation that talks with officials in Essar or in the UK-headquartered Vodafone, which is keen to acquire a controlling stake in Hutchison Essar, were imminent.

HTIL confirmed last week that it had been approached by “various potentially interested parties” regarding a possible sale of its equity interests in Hutchison Essar, but that “there is no assurance that a sale may result from these approaches.”

A telecom analyst in a multinational financial institution said on condition of anonymity that if the reports of Sarin’s and Ruia’s presence in Hong Kong were confirmed, “perhaps it’s a sign of which way the wind is blowing.” Even if the Ruias’ reported bid for a buyout of Hutchison doesn’t go through, they may prefer Vodafone since it would mean that they will continue to “run the show” in India, the analyst said.

BNP Paribas’ senior credit analyst (Asia Pacific) Vijay Chander says that irrespective of which of the bidders was considered a “better fit”, HTIL officials were “duty-bound” to their shareholders to recommend acceptance of the highest bid. “The market will speak, and one or other bidder could even now raise the stakes,” he added. 

HTIL on Wednesday effectively set a benchmark for the asset sale, confirming media reports that the company would only entertain offers “well in excess of $14 billion.

Financial Times had quoted Hutchison finance director Frank Sixt as saying that the $13.5 billion bid made earlier in December by Maxis and Texas Pacific “is not a valuation that would excite us”. (Sixt’s comments had been made prior to HTIL’s statement last week acknowledging that it had been approached by various interested parties.)

Sixt further noted that “a lot of people are interested in having an Indian asset. We have one which we are very pleased with. And really there has not been anything that would rise to the level of being an offer capable of acceptance.”

Turning point

At $20 billion, the game is no longer worth it for Reliance Communications.

But Ambani benefits by pushing up the takeover price for new entrants.

Only Ruias have some leverage on how high HTIL will let bids go.