Wherever Hutchison goes, bidders follow
The way suitors are lining up for Li Ka-shing’s 67% stake, one could forget if there are any sellers at all.
By Shishir Prasad, TNN |
MUMBAI: The way suitors - Anil Ambani, Vodafone, Maxis, Verizon and the Hindujas - are lining up for Li Ka-shing’s 67% stake in Hutchison Essar, one could be forgiven for forgetting if there are any sellers at all. Hutchison has reportedly termed the Maxis bid as too low and the Ruias seem to be playing their variation of Ruy Lopez defence by offering to buy out Mr Li’s stake. The Ruias’ move has got bankers talking; some have termed the move as “confusing”, while others say it is a signal that Ruias aren’t really happy with the valuation and want it to go higher.
Consider the “confused” lot first, before we move to the enlightened ones. “Why should a Vodafone or a Reliance bid if they aren’t sure whether the minority partner is willing to sell?” questions a private equity investor. A foreign partner would ideally want an Indian partner of choice and someone like Reliance would prefer full control of Hutch rather than have someone with 30% sitting in the company.
Regulatory constraints ensure that for a foreign bidder, the presence of an Indian partner is essential as no more than 74% stake can be held by a foreign investor. “Ideally when you formulate a bid, you want to be sure that you are going to get control and that is not very clear right now,” says an investment banker close to Hutchison Essar.
So what’s a Vodafone or a Reliance to do? “Definitely insist on getting the Ruias’ consent on the final price. Ideally, Vodafone should be talking directly to Essar and telling them that they will get a share of the upside if the final sale price per share is above a certain threshold, and protection from any downside in case the final price is below their expectation,” says a private equity investor.
Essentially, what this means is that if the expectation of Essar is, say, a $16-billion valuation and the final price is $22 billion, then Essar gets to keep a part of the $6 billion difference. If the valuation is lower, say $14 billion, then Essar gets compensated for the difference. In effect, there is a premium for acquisition for Ruias’ stake. That’s counter-intuitive because Ruias hold a minority position in the company. This is not the case if one considers what the acquisition of Ruias’ stake will bring: an ability to choose an Indian partner of choice and a compliance with regulatory issues.
Moving on to the enlightened lot. These people believe that Essar is implicitly signalling that they want a higher price. “Hutchison will know they have hit the right valuation when the Ruias will turn sellers,” says an investment banker close to the deal. They would sell if the price moves up.
But is their expectation justified? At $20-22 billion value of the company, the deal is already being termed ‘expensive’ by the market and with the impending investments to be made in 3G and ‘C’ circle rollouts for Hutch, it turns even more so. Are the Ruias telling Mr Li: “At the current price you don’t buy me out; I buy you out”? Or is it simply a good cop, bad cop routine played to get the price that the two sellers want?
shishir.prasad@timesgroup.com
Consider the “confused” lot first, before we move to the enlightened ones. “Why should a Vodafone or a Reliance bid if they aren’t sure whether the minority partner is willing to sell?” questions a private equity investor. A foreign partner would ideally want an Indian partner of choice and someone like Reliance would prefer full control of Hutch rather than have someone with 30% sitting in the company.
Regulatory constraints ensure that for a foreign bidder, the presence of an Indian partner is essential as no more than 74% stake can be held by a foreign investor. “Ideally when you formulate a bid, you want to be sure that you are going to get control and that is not very clear right now,” says an investment banker close to Hutchison Essar.
So what’s a Vodafone or a Reliance to do? “Definitely insist on getting the Ruias’ consent on the final price. Ideally, Vodafone should be talking directly to Essar and telling them that they will get a share of the upside if the final sale price per share is above a certain threshold, and protection from any downside in case the final price is below their expectation,” says a private equity investor.
Essentially, what this means is that if the expectation of Essar is, say, a $16-billion valuation and the final price is $22 billion, then Essar gets to keep a part of the $6 billion difference. If the valuation is lower, say $14 billion, then Essar gets compensated for the difference. In effect, there is a premium for acquisition for Ruias’ stake. That’s counter-intuitive because Ruias hold a minority position in the company. This is not the case if one considers what the acquisition of Ruias’ stake will bring: an ability to choose an Indian partner of choice and a compliance with regulatory issues.
Moving on to the enlightened lot. These people believe that Essar is implicitly signalling that they want a higher price. “Hutchison will know they have hit the right valuation when the Ruias will turn sellers,” says an investment banker close to the deal. They would sell if the price moves up.
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But is their expectation justified? At $20-22 billion value of the company, the deal is already being termed ‘expensive’ by the market and with the impending investments to be made in 3G and ‘C’ circle rollouts for Hutch, it turns even more so. Are the Ruias telling Mr Li: “At the current price you don’t buy me out; I buy you out”? Or is it simply a good cop, bad cop routine played to get the price that the two sellers want?
shishir.prasad@timesgroup.com
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