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COM SEMESTER I
ROLL NO. 65
PROJECT REPORT
TITLE OF THE PROJECT
A REPORT ON ACQUISITION AND MERGER OF
VODAFONE AND HUTCH
SUBMITTED TO:
JAI HIND COLLEGE
A ROAD, CHRUCHGATE, MUMBAI 400020, MAHARSHTRA
SUBMITTED BY:
HARSH TANWANI
MASTERS OF COMMERCE ADVANCED ACCOUNTANCY
SEMESTER II
ACADEMIC YEAR 2015-16
JAI HIND COLLEGE, MUMBAI.
SUBMITTED THROUGH:
PROF. SANTOSH GHAG
M.COM SEMESTER - II
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CERTIFICATE
Signature of External
Examiner
DATE:
PLACE: MUMBAI
COLLEGE SEAL
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DECLARATION
HARSH TANWANI
(STUDENT)
DATE:
PLACE: MUMBAI
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ACKNOWLEGDEMENT
Further, I would like to thank the faculty of Jai hind College, without their
cooperation I would not have ventured into such a study.
I express my deep gratitude to my entire college friends and my family
members whose efforts and creativity helped me in giving the final structure
to this project work.
I am also thankful to all those seen and unseen hands and heads, which have
been of help in the completion of this project work.
Date:
Place: Mumbai
HARSH TANWANI
(Signature of student)
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Table of Contents
Sr. no
Title
Page no.
Executive Summary
1.1
Introduction
1.2
Types
10
1.3
Motives
12
REVIEW OF LITERATURE
15
2.1
Introduction
16
2.2
16
Ch. 1
Ch. 2
22
Ch. 3
3.1
VODAFONE
29
3.2
HUTCH-ESSAR
3.3
HISTORY
34
35
3.4
3.5
3.6
3.7
IMMEDIATE CHALLENGES
3.8
36
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3.9
LEGAL ISSUES
Ch. 4
CONCLUSION
42
BIBLIOGRAPHY
43
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Executive Summary
The Vodafone-Hutch deal is one of the largest M&A deal executed by overseas
firm in Indian subcontinent. Today Vodafone business in India has been
successfully integrated into the group and now has over 44 million customers, with
over 50 per cent pro forma revenue growth. Revenues increased by 50 per cent
during the year driven by rapid expansion of the customer base with an average of
1.5 million net additions per month since acquisition In todays volatile market,
where major M&A deals are showing negative growth or companies are looking
for Government Bailout money, Vodafone acquisition of hutch is a major
contributor to its revenue .While Indias revenues grew by 29.6 percent other
APAC countries posted far lower growths at 10 percent in Egypt, 7 percent in
Australia and 3 percent in New Zealand at constant exchange rates. This Report
covers the various aspects of M&A along with insights on Vodafone Merger.
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1
INTRODUCTION TO MERGER AND ACQUISITION
1.1
1.2
1.3
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1
INTRODUCTION TO MAHINDRA & MAHINDRA LIMITED
1.1
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and weaknesses, depending on the given situation. However, the most commonly
adopted method of consolidation by firms has been through M&As. Though both
mergers and acquisitions lead to two formerly independent firms becoming a
commonly controlled entity, there are subtle differences between the two. While
acquisition refers to acquiring control of one corporation by another, merger is a
particular type of acquisition that results in a combination of both the assets and
liabilities of acquired and acquiring firms. In a merger, only one organization
survives and the other goes out of existence. There are also ways to acquire a firm
other than a merger such as stock acquisition or asset acquisition.
1.2
Horizontal Mergers
Horizontal mergers happen when a company merges or takes over another
company that offers the same or similar product lines and services to the final
consumers, which means that it is in the same industry and at the same stage of
production. Companies, in this case, are usually direct competitors. For example, if
a company producing cell phones merges with another company in the industry
that produces cell phones, this would be termed as horizontal merger. The benefit
of this kind of merger is that it eliminates competition, which helps the company to
increase its market share, revenues and profits. Moreover, it also offers economies
of scale due to increase in size as average cost decline due to higher production
volume. These kinds of merger also encourage cost efficiency, since redundant and
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wasteful activities are removed from the operations i.e. various administrative
departments or departments suchs as advertising, purchasing and marketing.
Vertical Mergers
A vertical merger is done with an aim to combine two companies that are in the
same value chain of producing the same good and service, but the only difference
is the stage of production at which they are operating. For example, if a clothing
store takes over a textile factory, this would be termed as vertical merger, since the
industry is same, i.e. clothing, but the stage of production is different: one firm is
works in territory sector, while the other works in secondary sector. These kinds of
merger are usually undertaken to secure supply of essential goods, and avoid
disruption in supply, since in the case of our example, the clothing store would be
rest assured that clothes will be provided by the textile factory. It is also done to
restrict supply to competitors, hence a greater market share, revenues and profits.
Vertical mergers also offer cost saving and a higher margin of profit, since
manufacturers share is eliminated.
Concentric Mergers
Concentric mergers take place between firms that serve the same customers in a
particular industry, but they dont offer the same products and services. Their
products may be complements, product which go together, but technically not the
same products. For example, if a company that produces DVDs mergers with a
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company that produces DVD players, this would be termed as concentric merger,
since DVD players and DVDs are complements products, which are usually
purchased together. These are usually undertaken to facilitate consumers, since it
would be easier to sell these products together. Also, this would help the company
diversify, hence higher profits. Selling one of the products will also encourage the
sale of the other, hence more revenues for the company if it manages to increase
the sale of one of its product. This would enable business to offer one-stop
shopping, and therefore, convenience for consumers. The two companies in this
case are associated in some way or the other. Usually they have the production
process, business markets or the basic technology in common. It also includes
extension of certain product lines. These kinds of mergers offer opportunities for
businesses to venture into other areas of the industry reduce risk and provide
access to resources and markets unavailable previously.
Conglomerate Merger
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Increases liquidity for owners If the acquiring firm is a large company and
target company is a small organization then the target companys shareholders may
find it very appealing that after merger their shares liquidity and marketability will
likely be considerably better.
Gaining access to funds The acquiring company may have high financial
leverage (a lot of debt) thereby making access to additional external debt financing
very limited. Therefore, one of the motives of the acquiring company to undertake
the merger is to merge with a company which has a healthy liquidity position with
low or non-existent financial leverage (very little or no debt).
Growth This is one of the most common motives for mergers. It may be cheaper
and less risky for the acquiring company to merge with another provider in a
similar line of business than to expand operations internally. It is also much faster
to grow by acquisition.
Diversification Diversification is an external growth strategy and sometimes
serves as a motive for a merger. For example, if an organization operates in a
volatile industry, it may decide to undertake a merger to hedge itself against
fluctuations in its own market. Another example can be when an acquiring
company pursues a target company which is located in different state or country.
This is called a geographical diversification.
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2
REVIEW OF LITERATURE
2
REVIEW OF LITERATURE
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3
MERGER AND ACQUISITION OF VODAFONE AND HUTCH
3.1
VODAFONE
3.2
HUTCH-ESSAR
3.3
HISTORY
3.4
3.5
3.6
3.7
IMMEDIATE CHALLENGES
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3.9
LEGAL ISSUES
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3
3.1 VODAFONE
Vodafone is a mobile network operator with its headquarters in Newbury,
Berkshire, England, UK. It is the largest mobile telecommunications network
company in the world by turnover and has a market value of about 75 billion
(August 2008). Vodafone currently has operations in 25 countries and partner
networks in a further 42 countries. The name Vodafone comes from Voice data
fone, chosen by the company to reflect the provision of voice and data services
over mobile phones. Vodafone Essar is owned by Vodafone 52%, Essar Group
33%, and other Indian nationals, 15%. On February 11, 2007, Vodafone agreed to
acquire the controlling interest of 67% held by Li Ka Shing Holdings in HutchEssar for US$11.1 billion, pipping Reliance Communications, Hinduja Group, and
Essar Group, which is the owner of the remaining 33%. The whole company was
valued at USD 18.8 billion. The transaction closed on May 8, 2007. As of Nov
2008 Vodafone Essar has 58764164 or 23.57% of total 249349436 GSM mobile
connections in India. Vodafone Indias share in the mobile phone operator market
rose to 18 percent.
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HUTCH-ESSAR
Hutch Essar was a leading Indian telecommunications mobile operator with 23.3
million customers at 31 December 2006, representing a 16.4% national market
share. Hutch Essar operates in 16 circles and has licenses in an additional six
circles. In the year to 31 December 2005, Hutch Essar reported revenue of
US$1,282 million, EBITDA of US$415 million, and operating profit of US$313
million. In the six months to 30 June 2006, Hutch Essar reported revenue of
US$908 million, EBITDA of US$297 million, and operating profit of US$226
million. Up until January 2006, Hutch Essar had licenses in 13 circles, of which
nine have 900 MHz spectrum. In January 2006, Hutch Essar acquired BPL, thereby
adding three circles, each operating with 900 MHz spectrum. In October 2006,
Hutch Essar acquired Spacetel, adding six further licenses, with operations planned
to be launched during 2007.
3.3
HISTORY
Hutchison-Essar
Year and Events
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2000 (Jan) Hutchison acquires a 49 per cent stake in Sterling Cellular in the Delhi
circle from Swisscom, an Essar Group company. A few weeks later, the Orange
brand name replaces Max Touch in Mumbai.
2000 (July) Hutchison and Kotak together acquire a 100 per cent stake in Usha
Martin Telekom in Kolkata circle.
2000 (Sep) Hutchison acquires a 49 per cent stake in Fascel, which operates in
Gujarat, from Shinawatra.
2001 Hutchison puts in the bid to provide cellular licences in Chennai, Andhra
Pradesh, Karnataka and Maharashtra. It wins all except Maharashtra.
2003 Essar Teleholdings sells its operations in Rajasthan, Uttar Pradesh (East) and
Haryana to Hutchison Essar. Essar was running these operations through group
company, Aircel Diglink India Ltd. Hutchison acquires licence to provide cellular
services in Punjab. This is bought from Escotel.
2004 Essar picks France Telecoms 9.9% stake in BPL Communications.
Hutchison Telecommunications International Ltd (HTIL) gets listed on the Hong
Kong and New York stock exchanges. Launches services in Punjab, West Bengal
and Uttar Pradesh (West). Also receives approval from the regulators to consolidate
its operations in India.
2005 Hutchison Essar consolidates its various mobile companies in India to create
a single entity.
A little later, Hutchison Essar signs agreements with the Essar Group to acquire
BPL Communications and Essar Spacetel. During the same year, Hutch becomes a
national brand. Essar Teleholdings buys Max Telecom Ventures 3.16% stake in
Hutchison Essar for Rs. 657 crore. Egyptian cellular service provider, Orascom,
acquires a 19.3 per cent stake in HTIL.
2006 Kotak sells 8.33% stake to Analjit Singh for Rs 1019 crore. HTIL acquires a
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Essar to 67 per cent. Essar holds the balance 33 per cent. Hutchison-Essar receives
the letter of intent (LoI) from the government to provide cellular services in six
more circles. Hutchison wants to exit.
In February 2007 Vodafone announced officially its acquisition of 67% of HutchEssar for
$11.08 billion defeating the rival bidder Reliance Communications.
3.4
There are two main reasons which are responsible for Li Ka-shing to leave India.
They are:
Hutch-Essar: Mutual Distrust.
A right time to quit Indian operations to finance other operations Li Ka-Shing was
the 10th richest man globally in 2006, is known as a businessman who spots an
opportunity early, invests in it and exits at a neat premium. It is only after he exits
that the rush begins. In the early 1990s, he sold his stake in Star TV to Rupert
Murdoch for $825 million. The Hutch Essar deal has netted him a neat $8.48
billion. What could he do with that money? Li is a major player in the ports and
retail businesses. Getting access to the ports business in India is difficult, thanks to
being from China. However, with retail being the new mantra in India, Li could be
looking at a third entry. His retail outfits include Watsons and PARKnSHOP.
While Watsons operates 7,700 stores in 37 countries, PARKnSHOP is a
supermarket chain.
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Industry sources say that several incidents revealed the deepening rift between
Hutch and Essar. They say that as telecom valuations in India started rising, Essar
tried to increase its stake in the joint venture. However, in December 2005,
Orascom of Egypt bought a 19.3 per cent stake in Hutchison Whampoa. This
indirectly gave it control of 12.93 per cent stake in Hutchison Essar. The stake sale
decision was reportedly taken without Essars knowledge and strained its relations
with Hutchison. Following this Essar approached the Department of
Telecommunications on this sale saying that Hutchison Whampoas equity sale to
Orascom may have an impact on national security as Orascom has a stake in
Pakistans Mobilink. Subsequently, say sources, Essar sounded out some private
equity investors about buying out Hutchisons equity holding in Hutchison Essar.
What followed was the tussle between Essar and Hutch over BPLs Mumbai circle.
Sources say that the decision to split the merger of BPL Communication into
Hutchison Essar may also have been prompted by the potential of the Mumbai
circle. (BPLs mobile operations included BPL Cellular, which had licences for
Maharashtra, Tamil Nadu and Kerala, and BPL Mobile, which had the licence for
Mumbai. BPL Cellular was merged with Hutchison Essar earlier this year.)
3.5
In 2007, Vodafone Group bought the Indian telecom assets of Hong Kong's
Hutchison
Telecommunications International Ltd. It paid US$11 billion for a 67% stake in
Hutchison Essar.
The latter was the operating company in India for what is now the third-largest
operator with 111 million users. Vodafone was the buyer. Hutchison, the seller,
made huge capital gains. Yet since then, Vodafone has been battling it out in the
courts against the Indian Income Tax (IT) department, which has saddled it with a
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US$2.1 billion tax claim. Hutchison, which pocketed the capital gains, is nowhere
in the picture.
The transaction was executed through a Hutchinson company located in the
Cayman Islands.
Round 1: began in September 2007, when the Tax Department issued a show
cause notice to Vodafone that said Vodafone was liable to pay withholding tax on
the purchase amount.
Round 2: Vodafone filed a writ at the Bombay High Court disputing the tax
department's jurisdiction in an overseas transaction. But the petition was dismissed
and Vodafone then appealed to the Supreme Court marking the third round of
hostilities.
In January 2009, the Supreme Court sent the case back to the Tax Department to
decide on the jurisdiction issue.
Hutchison held call options over companies controlled by Asim Ghosh and Analjit
Singh as also over SMS Investments Pvt. Ltd. aggregating to approximately 15%
of the shareholding of HEL. The benefit of these options enured in favour of a
corporate entity called 3 Global Services Private Ltd., a company registered under
the Companies' Act, 1956.
Many important documents relevant to the deal have never been made public, so it
is unclear if the tax claim is a result of Vodafone's overlooking a key issue or
overconfidence. In such transactions, the buyer is supposed to deduct tax at source
(or withholding tax) and pay that to the government. This is a transaction involving
foreign companies and the seller can easily disappear once the money is in the
bank. The buyer, on the other hand, has the Indian assets and, in a worst case
scenario, those can be attached if there is any default.
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VODAFONES successful bid for Hutchisons 67 per cent stake in Hutch Essar
may have been driven by its compulsions to enter the high-growth Indian market,
but what clinched the deal for the UK-based company was the enormous booty of
cash at its disposal.
Analysts estimate that Vodafone was probably the least leveraged of all the bidders
and this helped them bid aggressively. It already has $5 billion from the sale of its
Japanese unit for $15 billion last year (the remaining $10 billion is expected to go
back to shareholders). It will also get $1.62 billion cash from its 5.6 per cent stake
sale in Bharti. This $6.62 billion may go towards funding the $11.1-billion price
tag for the 67 per cent stake.
In addition, Vodafone has free cash reserves (for the first six months of 2006) in
excess of $3 billion. It has also sold its 25 per cent stake in Swisscom Mobile and
exited Belgium. Therefore, the debt component in the deal is likely to be low,
according to an analyst.
Unconfirmed sources say that Reliance Communications was wary of raising too
much debt, which may have acted as a deterrent. Whether the UK-based telco
overpaid is another question. Investment bankers in India, too, have underlined
Vodafones advantage, thanks to its access to cash and its capability to strike the
least leveraged deal.
3.7
IMMEDIATE CHALLENGES
Hutch is going to be a tough battle ahead as the worlds largest mobile operator (by
revenues) tries to woo the price-conscious Indian consumer. Vodafone is targeting
100 million Indian subscribers in three years (Hutch has 24.41 million at present).
Thats half its current subscriber base across 27 countries. But getting there means
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adding between 1.5 million and 2 million subscribers every month. While Hutch
has been adding around 1 million subscribers a month, market leader Bharti has
been adding 1.75 million. Vodafone needs to exceed Bhartis net subscriber
additions to be the leader in three years. Second, it needs to tap rural India in a big
way. Vodafone has earmarked an investment of $2 billion over the next couple of
years to strengthen its presence here. The agreement with Bharti fits in perfectly to
tap the hinterland. Realizing the importance of familiarity with the terrain, Sarin
has opted to retain Asim Ghosh as the man to head the venture. Once the board
approves it, Ghosh will formally take charge. After all, thats what he has been
doing as Hutchisons key lieutenant over the past few years. However, even before
it gets to that, Vodafone has to ensure that the Essar Group, the 33 percent partner
in the venture, does not go to court on its entry. To insure against such a possibility,
Vodafone has reserved the right to abandon the acquisition of the stake if litigation
is launched.
Summing these challenges we have: The cellular telephony is extremely competitive, and India has one of the lowest
ARPUs in the world. Besides, ARPU growth is slowing.
It has an uneasy equation with Essar, which is one-third partner in Hutch-Essar.
That could be a source of problem.
The Vodafone brand is relatively unknown in the Indian market. Besides the
brand will cost money and take time.
Telecom valuations are at a high and this could mean it is years Vodafone
recovers its multibillion dollar investment.
Its big competitors are home-grown majors, who can manage the environment
better.
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pointed out that the capital asset; that is the Hutch-Essar or now
Vodafone-Essar joint venture is situated here and was central to
the valuation of the offshore shares; that through the sale of
offshore shares, Hutch had sold Vodafone valuable rights - in that
the Indian asset including tag along rights, management rights
and the right to do business in India and that the offshore
transaction had resulted in Vodafone having operational control
over that Indian asset. The Department also argued that the
withholding tax liability always existed and the amendment was
just a clarification. The tax officers are saying that Hutch is
taxable on the profit they made from the sale - that is one aspect.
The second aspect is that Vodafone as a payer was liable to
deduct tax at source because they paid income to Hutch. Those
are the two different issues. The case was mainly about the
second issue where the Vodafone was liable or not and in
principle; it is possible that the department is right on the first
and yet not right on the second.
3.9 LEGAL ISSUES
(i) Whether a non-resident seller (Vodafone International) is liable to tax in India
on sale of shares of the foreign SPV?
(ii) Is a non-resident purchaser (HTIL) liable for deduction of tax on purchase of
shares of the foreign SPV while making payment to the non-resident seller?
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intermediate SPV interposed between the Cayman SPV and the Indian subsidiary
would act as a successful blocker entity.
Who is an Agent?
According to Section 160(1) of the Act, agent of the non-resident is
representative assesse, and Section 161 discusses the liability of representative
assesse. Section 163 defines agent to include a person who has a business
connection with the non-resident.
Passing of Laws Retrospectively:
In the 1975 Hindustan Machine Tools case, the Supreme Court held that the
legislature could pass laws retrospectively, with the exception that this power could
be challenged if the law was discriminatory. This same principle was reaffirmed in
1997 in Arooran Sugars Ltd case, where the Supreme Court that if the law does not
discriminate, it may be retrospective.
This is perhaps the first time tax authorities are attempting to tax a transaction
between two foreign companies involving transfer of an Indian asset. If the tax
liability is established, it could result in a tax liability of approximately $1.7
billion. Investors will be keeping a close eye on the upcoming Mumbai High Court
verdict. Either way, the next battle may be fought in the Supreme Court.
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4
CONCLUSION
BIBLIOGRAPHY
1.
2.
3.
4.
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5.
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