Essar VC is reported to have talks with Vodafone

LONDON: Let's take a Christmas break. As India-born Arun Sarin, chief executive of Vodafone, with the backing of his board, prepares to take on Anil Ambani for control of Hutch Essar's Indian business, and probably the Malaysian Maxis as well, expectations that Vodafone would present a bid as early as Friday went slightly off the mark with the company announcing that it is considering an acquisition, but no price and no details.

ET caught up with Essar vice-chairman Ravi Ruia on his way back to Mumbai. Right now, he's got fog at Heathrow on his mind, and is totally tight-lipped about Vodafone: "You know everything is at a preliminary stage and I can't say anything right now," he said. But this is clearly just episode one of this takeover drama, as he expects to be back in London in a week or ten days. The London Stock Exchange will now be closed for Christmas and re-opens only after Boxing Day.

Mr Ruia, it was reported, was to be in London for discussions with the Vodafone board, and it was widely expected that he would be made an offer along with Canning Fok of Hutch.

Hutchison Telecommunications International said in a statement on Friday that it had "been approached by various potentially interested parties regarding a possible sale of its equity interests in Hutchison Essar. No agreement in respect of such a possible sale has been entered into up to today's date. The company reiterates that there is no assurance that a sale may result from these approaches."

This twist is being variously interpreted – one, while Vodafone's board is in principle agreed to making an offer to acquire Hutch Essar, the price is still in question. The figures of $13 - $14 bn floating around, is, lower than what Hutchison is willing to accept. But Vodafone is bound by its own criteria.

In May, the company set out its acquisition critieria, saying that any returns on invested capital must exceed the local, risk-adjusted, cost of capital, within three to five years. According to one reported estimate, based on current analyst expectations, and assuming a $15bn enterprise value, cash returns from Hutchison Essar would be below 5 % 2010, compared with a cost of capital of at least 10 %.

Vodafone's shares dropped 1.5% by 12 noon GMT. Earlier on Friday, Vodafone confirmed that it is planning to jump into the fray for acquiring Hutch Essar, along with Reliance. "The board of Vodafone is considering the acquisition of a controlling interest in Hutch Essar in India. Such a transaction would be consistent with its stated strategy of seeking selected acquisition opportunities in developing markets," the company said in a statement. The process is at an early stage, and it may or may not lead to a transaction it further clarified. A vodafone spokesperson said that any further announcement would be made in due course.

The big question for the world's leading mobile operator Vodafone is the inevitable comparisons being made with its failed attempt to takeover over AT&T Wireless in 2004.

Britain's biggest mobile phone company had a minority stake in Verizon and sought to swap out of it to snap up AT&T Wireless. It lost out to Cingular Wireless after the bidding got crazy, shareholders had varieties of fits, and CEO Arun Sarin – a US citizen – has just managed to recover from the bashing Vodafone's credibility took in that round.

In many ways, the current move is being seen as a re-affirmation of the board's backing of Arun Sarin. Mr Sarin has, as reported extensively by the British media survived a board scuffle within Vodafone just a few months ago, given the company's lacklustre financial performance. Vodafone revealed a GBP 3.3bn half-yearly loss in November 2006.

This time around, though shareholders seem much more amenable to Vodafone's plans, as Vodafone's management has repeatedly stressed its strategy of increasing its presence in high-growth emerging markets, going so far as to hold an analysts open day to outline its plans. Vodafone picked up a Turkish company, Telsim, last year, and is hoping to turn it around earlier than expected.

Vodafone has ownership interests in 26 countries, and partnerships is 34 more. Based on ownership interests at 30 September 2006, the Group had 191.6 million proportionate customers in its subsidiaries, joint ventures, affiliates and investments. At 30 September 2006, there were 577.4 million venture customers.