Vodafone steps up effort for Hutch Essar buy
The takeover battle for Hutchison Essar intensified. Vodafone officials met the Department of Telecommunications (DoT) to seek clarity on FDI policy in India even as Goldman Sachs, JP Morgan and shareholder State Street warned the British firm about overstretching itself. A few interesting developments emerged. The Hinduja Group, which had earlier sold its stake in Hutch Essar, now wants a controlling stake in India's fourth-largest mobile service provider. Reports also suggested that US-based Verizon Communications has also evinced interest in Hutch Essar. Also, Hutchison Telecommunications International Ltd. (HTIL) disputed the claims by the Ruias of the Essar Group that they have the Right of First Refusal (RoFR). The Ruias on their part maintained that they should be first given the opportunity to buy the 67% stake held by its Hong Kong-based partner. Meanwhile, Reliance Communications has convened a Board meeting on January 10 to consider fund raising options as it gears up for a long drawn out bidding war.
Vodafone, the world's No.1 wireless telecom operator, reportedly agreed to raise its valuation of Hutch Essar to US$20bn. But, it would find it tough to convince shareholders about the deal. In May, the London-based company announced it M&A criteria, whereby the return on investment must exceed local risk-adjusted cost of capital in 3-5 years. Further, the internal rate of return (IRR) should exceed local risk-adjusted cost of capital by at least 2%. If Vodafone goes ahead with the Hutch Essar buy, it may not be able to meet these criteria, as the Indian company has been valued at US$21bn. HTIL itself is looking at a valuation of above US$14bn for its 67% stake in Hutch Essar. A JP Morgan note said that at US$22.8bn, it estimates that the return on invested capital would reach 7% in five years.
Cash returns from Hutch Essar would be below 5% till 2010, compared with a cost of capital of at least 10%. The rate of return too is not likely to exceed the local risk-adjusted cost of capital by the required 2%, says JP Morgan. Meanwhile, Goldman Sachs said that Vodafone’s balance sheet would be stretched if it paid over US$20bn for a controlling stake in Hutch Essar.
Videocon's Daewoo Electronics deal in trouble
Venugopal Dhoot's dream of stitching up another big-ticket acquisition in the global market turned sour. International media reports suggested that creditors of Daewoo Electronics Corp. spurned an offer by India's Videocon Industries Ltd. to slash the offer price by 13%. Videocon and RHJ International, the holding company of the US buyout fund Ripplewood, were picked as a preferred bidder in September 2006 to acquire the ailing Korean company for around 700 billion won or US$752mn. After due diligence, Videocon sought to cut the price by 13% from the initial agreement and make partial payment through convertible bonds, the Korea Economic Daily reported. But, experts said that the Korea Asset Management Corp., the main creditor with a 57.4% stake, and other creditors cast a "no" vote. Separately, a financial daily reports that Videocon could settle for a less than 10% reduction in the original offer price.
Woori Bank represents creditors owning 99% of Daewoo Electronics. It had sent a letter last week asking creditors of Daewoo Electronics whether they would accept the renewed offer by Videocon. Any offer required approval from at least 75% of votes held by creditors. The Memorandum of Understanding (MoU) signed in October between the Videocon-led consortium and Daewoo Electronics creditors expired on Dec. 22 without signing the main contract. The rejection would deal a blow to the Videocon's bid but it does not mean the end of the road. Regardless of the vote, the negotiation could continue with Videocon, as it is still the most likely buyer, creditor Woori Bank said. The only change will be that Videocon will no longer be the preferred bidder. Daewoo Electronics was a unit of the Daewoo Group, which collapsed in 1999 under US$80bn in debt. Shares of Videocon fell in Mumbai on the news.