Hutch deal and why RCOM is the favorite to buy Hutch?
Indian telecom sector as always has been my favorite because of its dynamism and fast growth. Back in 2004 who would have expected that the Indian mobile companies would add 5-6mn subscribers monthly? I had a very hard time in explaining this to my client when I was tracking this sector few years back (then typical monthly addition was around 1.5mn)
Now that the Hutch’s boss has supposedly thrown white towel in the ring, many suitors with their own interest have queued up. Prominent ones are RCOM, Vodafone and to an extent Maxis of Malaysia.
First of all, the question arises is Why does Hutchison Whampoa want to leave India? I feel that its boss Mr. Li Ka Shing has got a trading mentality.He sold Orange (which is now with France Telecom) to Mannessmann (nowwith Vodafone) during TMT boom of early 2000 at a huge profit of around $15bn.I read somewhere about him which says "As Li's power and influence grew it became clear that his real talent lay not just in having an uncanny eye foropportunities but also in knowing when to sell. He has long traded hisproperty assets in Hong Kong, predicting the market's peaks andtroughs with seeming clairvoyance, and he has applied his skills to other assets, too."Also since Hutch has been planning for IPO for a while, but in India FDI intelecom remains a gray area for long and was facing a lot ofdifficulties, so may be if they are getting good valuation they wantto shun off from India because of uncertainty. And to my believe if its EV is around $17bn then it’s per subscriber is valued at around $1000 which is an attractive valuation to exit.
Now why is Bharti not interested in Hutch? Firstly Mr Mittal is diversifying his interest into retail, insurance and other businesses. All these are cash guzzlers with long pay back periods. So he cannot commit any additional fund. Moreover since Bharti has its presence in all the 23 circles of India, adding Hutch will just lead to duplication of fixed assets without much synergy. Infact Bharti might gain from the transition phase of Hutch as few of Hutch’s subscribers might move out due to uncertainty of its ownership which might lead to temporary operational glitch.
Vodafone with its huge pocket and hunger to grow is considered to be a serious contender. Vodafone was present in Indian mobile market in 90s but left the market due to problem of its own. Now again it is back with a 10% stake in Bharti (acquired in 2005) and is now interested for Hutch. $17bn is its one year free cash flow!! Vodafone has been eyeing to enter into India for the past few years, it is doing well in emerging markets like Egypt and Turkey.
RCOM, which earlier planned to foray into GSM space thinks that it is the best opportunity to grab and to become pan India GSM player right from Day 1. Hutch and Essar group have license of almost across India. RCOM is today considered as a low profile mobile service provider due to its low ARPU generating customers (thanks to its cheaper rates). Hutch will result in its image makeover as Hutch is one of the highest ARPU generator thanks to its 80% subscribers based in Metros (40%) and Circle A (40%).
Agreed that since Capex for a GSM greenfield project has reduced substantially (around $250-a wild guess!!) and the equipment providers are giving credit facility these days, but good quality loyal subscriber base of 17mn weighs much more than cheaper fixed asset replacement cost. Moreover you would save your time and energy to acquire new subscriber. Acquiring a subscriber is also a costly affair as you lure them by subsidized handsets and free calls. My rough calculation shows that RCOM will eventually save around $150 per subscribers if it acquires Hutch rather than going on for greenfield GSM operation. So, this would reduce its ultimate cost for Hutch by $2.5bn!!!
Hypothetical case (All figures are rationally assumed)
ARPU (Rs./ Month)
Hutch- 450
RCOM-GSM greenfield- 325
EBITDA Margin
Hutch-45%
RCOM-GSM greenfield-30%
EBITDA (Rs./Month)
Hutch-202.5
RCOM-GSM greenfield-97.5
Monthly Churn Rate
Hutch-1.50%
RCOM-GSM greenfield-2.75%
Annual Churn Rate
Hutch-18%
RCOM-GSM greenfield-33%
Average stay of subscribers (based on churn)
Hutch-5.6 yrs
RCOM-GSM greenfield-3.0 yrs
Lifetime revennue of a subscriber (Rs)
Hutch- 30000
RCOM-GSM greenfield-11818
Lifetime EBITDA of a subscriber (Rs)
Hutch- 13500
RCOM-GSM greenfield-3545
Savings Rs 9955
PV Factor (Mid year) 1.40
PV of savings Rs. 7113
Savings in USD 158
If RCOM has to buy Hutch, it needs to buy more than 91% of it because of the TRAI’s regulation. So it needs to buy some of Essar’s stake also. (And I believe that is why even Essar group has also jumped into the ring to ultimately increase its value and to get it encased!)
RCOM has relatively low debt and since it has Blackstone and other major global buy-outs experts at its side so funding would not be a problem. Name any global bank which would not want to lend to one of the top 4 corporate house of India!!! Infact rather than paying in one go RCOM can make a deferred payment arrangement staggered in few years.
If RCOM buys Hutch it will lead to consolidation in the industry rather than status quo if Vodafone buys it. ADA group is very aggressive and its boss is known as one of the best deal makers and fund arrangers. How can we forget how Reliance ultimately bought BSES (now Reliance Energy) in a decade long effort? How can we forget the Reliance’s 90s foreign borrowing at an interest rate lower than then India’s Bank Rate?
ADA group is on an acquiring spree since Reliance group divided between the two brothers. Since Hutch is best fit for RCOM, I think its boss would do his level best to acquire it rather than easily let it go.
Vodafone may be the number 1 mobile company in the world in terms of revenues, but Indian corporate history has it that in most of the sectors local established players have outshined their global counterpart (partly due to government regulation).
Now that the Hutch’s boss has supposedly thrown white towel in the ring, many suitors with their own interest have queued up. Prominent ones are RCOM, Vodafone and to an extent Maxis of Malaysia.
First of all, the question arises is Why does Hutchison Whampoa want to leave India? I feel that its boss Mr. Li Ka Shing has got a trading mentality.He sold Orange (which is now with France Telecom) to Mannessmann (nowwith Vodafone) during TMT boom of early 2000 at a huge profit of around $15bn.I read somewhere about him which says "As Li's power and influence grew it became clear that his real talent lay not just in having an uncanny eye foropportunities but also in knowing when to sell. He has long traded hisproperty assets in Hong Kong, predicting the market's peaks andtroughs with seeming clairvoyance, and he has applied his skills to other assets, too."Also since Hutch has been planning for IPO for a while, but in India FDI intelecom remains a gray area for long and was facing a lot ofdifficulties, so may be if they are getting good valuation they wantto shun off from India because of uncertainty. And to my believe if its EV is around $17bn then it’s per subscriber is valued at around $1000 which is an attractive valuation to exit.
Now why is Bharti not interested in Hutch? Firstly Mr Mittal is diversifying his interest into retail, insurance and other businesses. All these are cash guzzlers with long pay back periods. So he cannot commit any additional fund. Moreover since Bharti has its presence in all the 23 circles of India, adding Hutch will just lead to duplication of fixed assets without much synergy. Infact Bharti might gain from the transition phase of Hutch as few of Hutch’s subscribers might move out due to uncertainty of its ownership which might lead to temporary operational glitch.
Vodafone with its huge pocket and hunger to grow is considered to be a serious contender. Vodafone was present in Indian mobile market in 90s but left the market due to problem of its own. Now again it is back with a 10% stake in Bharti (acquired in 2005) and is now interested for Hutch. $17bn is its one year free cash flow!! Vodafone has been eyeing to enter into India for the past few years, it is doing well in emerging markets like Egypt and Turkey.
RCOM, which earlier planned to foray into GSM space thinks that it is the best opportunity to grab and to become pan India GSM player right from Day 1. Hutch and Essar group have license of almost across India. RCOM is today considered as a low profile mobile service provider due to its low ARPU generating customers (thanks to its cheaper rates). Hutch will result in its image makeover as Hutch is one of the highest ARPU generator thanks to its 80% subscribers based in Metros (40%) and Circle A (40%).
Agreed that since Capex for a GSM greenfield project has reduced substantially (around $250-a wild guess!!) and the equipment providers are giving credit facility these days, but good quality loyal subscriber base of 17mn weighs much more than cheaper fixed asset replacement cost. Moreover you would save your time and energy to acquire new subscriber. Acquiring a subscriber is also a costly affair as you lure them by subsidized handsets and free calls. My rough calculation shows that RCOM will eventually save around $150 per subscribers if it acquires Hutch rather than going on for greenfield GSM operation. So, this would reduce its ultimate cost for Hutch by $2.5bn!!!
Hypothetical case (All figures are rationally assumed)
ARPU (Rs./ Month)
Hutch- 450
RCOM-GSM greenfield- 325
EBITDA Margin
Hutch-45%
RCOM-GSM greenfield-30%
EBITDA (Rs./Month)
Hutch-202.5
RCOM-GSM greenfield-97.5
Monthly Churn Rate
Hutch-1.50%
RCOM-GSM greenfield-2.75%
Annual Churn Rate
Hutch-18%
RCOM-GSM greenfield-33%
Average stay of subscribers (based on churn)
Hutch-5.6 yrs
RCOM-GSM greenfield-3.0 yrs
Lifetime revennue of a subscriber (Rs)
Hutch- 30000
RCOM-GSM greenfield-11818
Lifetime EBITDA of a subscriber (Rs)
Hutch- 13500
RCOM-GSM greenfield-3545
Savings Rs 9955
PV Factor (Mid year) 1.40
PV of savings Rs. 7113
Savings in USD 158
If RCOM has to buy Hutch, it needs to buy more than 91% of it because of the TRAI’s regulation. So it needs to buy some of Essar’s stake also. (And I believe that is why even Essar group has also jumped into the ring to ultimately increase its value and to get it encased!)
RCOM has relatively low debt and since it has Blackstone and other major global buy-outs experts at its side so funding would not be a problem. Name any global bank which would not want to lend to one of the top 4 corporate house of India!!! Infact rather than paying in one go RCOM can make a deferred payment arrangement staggered in few years.
If RCOM buys Hutch it will lead to consolidation in the industry rather than status quo if Vodafone buys it. ADA group is very aggressive and its boss is known as one of the best deal makers and fund arrangers. How can we forget how Reliance ultimately bought BSES (now Reliance Energy) in a decade long effort? How can we forget the Reliance’s 90s foreign borrowing at an interest rate lower than then India’s Bank Rate?
ADA group is on an acquiring spree since Reliance group divided between the two brothers. Since Hutch is best fit for RCOM, I think its boss would do his level best to acquire it rather than easily let it go.
Vodafone may be the number 1 mobile company in the world in terms of revenues, but Indian corporate history has it that in most of the sectors local established players have outshined their global counterpart (partly due to government regulation).
posted by Vikas Maheshwari, CFA at 2:18 AM
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