12th Feb 2007 07:00
Vodafone Group Plc11 February 2007 11 February 2007 VODAFONE AGREES TO ACQUIRE CONTROL OF HUTCH ESSAR IN INDIA Vodafone announces today that it has agreed to acquire a controlling interest inHutchison Essar Limited ("Hutch Essar"), a leading operator in the fast growingIndian mobile market, via its subsidiary Vodafone International Holdings B.V.Vodafone also announces that it has signed a memorandum of understanding ("MOU")with Bharti Airtel Limited ("Bharti") on infrastructure sharing and that it hasgranted an option to a Bharti group company to buy its 5.6% direct interest inBharti. The key highlights are: Acquisition of a controlling interest in Hutch Essar * Vodafone announces it has agreed to acquire companies that control a 67% interest in Hutch Essar from Hutchison Telecom International Limited ("HTIL") for a cash consideration of US$11.1 billion (£5.7 billion) * Vodafone will assume net debt of approximately US$2.0 billion (£1.0 billion) (1) * The transaction implies an enterprise value of US$18.8 billion (£9.6 billion) for Hutch Essar * The acquisition meets Vodafone's stated financial investment criteria Infrastructure sharing MOU with Bharti * Whilst Hutch Essar and Bharti will continue to compete independently, Vodafone and Bharti have entered into a MOU relating to a comprehensive range of infrastructure sharing options in India between Hutch Essar and Bharti * Infrastructure sharing is expected to reduce the total cost of delivering telecommunication services, especially in rural areas, enabling both parties to expand network coverage more quickly and to offer more affordable services to a broader base of the Indian population Local partners * The Essar Group ("Essar") currently holds a 33% interest in Hutch Essar and Vodafone will make an offer to buy this stake at the equivalent price per share it has agreed with HTIL * Vodafone's arrangements with the other existing minority partners will result in a shareholder structure post acquisition that meets the requirements of India's foreign ownership rules (1) Estimated as at 31 January 2007 10% economic interest in Bharti * Vodafone has granted a Bharti group company an option, subject to completion of the Hutch Essar acquisition, to buy its 5.6% listed direct interest in Bharti for US$1.6 billion (£0.8 billion) which compares with the acquisition price of US$0.8 billion (£0.5 billion) * If the option is not exercised, Vodafone would be able to sell this 5.6% interest * Vodafone will retain its 4.4% indirect interest in Bharti, underpinning its ongoing relationship Commenting on the transaction, Arun Sarin, Chief Executive of Vodafone, said: "We are delighted to be deepening our involvement in the Indian mobile marketwith the full range of Vodafone's products, services and brand. Thisannouncement is clear evidence of how we are executing our strategy ofdeveloping our presence in emerging markets. We have concluded this transactionwithin our stated financial investment criteria and we are confident that thiswill prove to be an excellent investment for our shareholders. Hutch Essar is animpressive, well run company that will fit well into the Vodafone Group." Sir John Bond, Chairman of Vodafone, said: "India is destined to become one of the largest and most important mobilemarkets in the world and this acquisition will enable our shareholders tobenefit from our increased investment in this market. We also look forward toplaying our part in delivering the significant economic and social benefitswhich mobile telephony can bring to the people of India." Principal benefits The principal benefits to Vodafone of the transaction are: * Accelerates Vodafone's move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market - India is the world's 2nd most populated country with over 1.1 billion inhabitants - India is the fastest growing major mobile market in the world, with around 6.5 million monthly net adds in the last quarter - India benefits from strong economic fundamentals with expected real GDP growth in high single digits * Hutch Essar delivers a strong existing platform in India - nationwide presence with recent expansion to 22 out of 23 licence areas ("circles") - 23.3 million customers as at 31 December 2006, equivalent to a 16.4% nationwide market share - year-on-year revenue growth of 51% and an EBITDA margin of 33% in the six months to 30 June 2006 - experienced and highly respected management team * Driving additional value in Hutch Essar - accelerated network investment driving penetration and market share growth - infrastructure sharing MOU with Bharti plans to reduce substantially network opex and capex - potential for Hutch Essar to bring Vodafone's innovative products and services to the Indian market, including Vodafone's focus on total communication solutions for customers - Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices * Increases Vodafone's presence in higher growth emerging markets - proportion of Group statutory EBITDA from the EMAPA region expected to increase from below 20% in the financial year ending 31 March 2007 (FY2007) to over a third by FY2012 Operational plan for Hutch Essar Vodafone will execute an operational plan to build on the strengths of HutchEssar in order to capture the Indian telecom growth opportunity. Key strategic objectives In the context of penetration that is expected to exceed 40% by FY2012, Vodafoneis targeting a 20-25% market share within the same timeframe. The operationalplan focuses on the following objectives: * Expanding distribution and network coverage * Lowering the total cost of network ownership * Growing market share * Driving a customer focused approach Site sharing The MOU outlines a process for achieving a more extensive level of site sharingand covers both new and existing sites. Around one third of Hutch Essar'scurrent sites are already shared with other Indian mobile operators and Vodafoneis planning that around two thirds of total sites will be shared in the longerterm. The MOU recognises the potential for achieving further efficiencies by sharinginfrastructure with other mobile operators in India. The MOU envisages the potential, subject to regulatory approval and commercialdevelopment, to extend the agreement to sharing of active infrastructure such asradio access network and access transmission. Financial assumptions As part of the operational plan, Vodafone expects to increase capitalinvestment, particularly in the first two to three years, with capex as apercentage of revenues reducing to the low teens by FY2012. The operational planresults in an FY2007-12 EBITDA CAGR percentage around the mid-30s. Cash taxrates of 11-14% for FY2008-12 are expected due to various tax incentives andwill trend towards approximately 30-34% in the long term. As a result of this operational plan, the transaction meets Vodafone's statedfinancial investment criteria, with a ROIC exceeding the local risk adjustedcost of capital in the fifth year and an IRR of around 14%. Financial impact on Vodafone The transaction enhances Vodafone's growth profile on a pro forma statutorybasis, with Vodafone's revenue and EBITDA CAGR increasing by around one and ahalf percentage points over the three year period to 31 March 2010. The transaction is expected to be broadly neutral to adjusted earnings per sharein the first year post acquisition and accretive thereafter excluding the impactof intangible asset amortisation for the transaction. Including this impact, thetransaction is expected to be approximately seven percent dilutive to adjustedearnings per share in the first year post acquisition and neutral by the fifthyear. (2) The Board remains committed to its longer term targeted dividend payout of 60%of adjusted earnings per share. Furthermore, the Board expects the dividend pershare to be at least maintained in the short term. The acquisition of HTIL's controlling interest in Hutch Essar will be financedthrough debt and existing cash reserves and Vodafone expects pro forma net debtof around £22.8-23.3 billion (3) at 31 March 2007 as a result of this transaction. Further transaction details The transaction is expected to close in the second quarter of calendar year 2007and is conditional on Indian regulatory approval. HTIL's existing partners, who between them hold a 15% interest in Hutch Essar,have agreed to retain their holdings and become partners with Vodafone.Vodafone's interest will be 52% following completion and Vodafone will exercisefull operational control over the business. If Essar decides to acceptVodafone's offer, these local minority partners between them will increase theircombined interest in Hutch Essar to 26%. In the event that the Bharti group company exercises its option over Vodafone's5.6% direct interest in Bharti, consideration will be received up to 18 monthsafter completion of the Hutch Essar acquisition. Vodafone will continue to hold its 26% interest in Bharti Infotel PrivateLimited ("BIPL"), which is equivalent to an indirect 4.4% economic interest inBharti. Vodafone will now account for its entire interest as an investment. UBS Investment Bank acted as financial adviser to Vodafone. (2) Including the estimated effect of acquired intangible asset amortisation ofapproximately £0.3-0.4 billion per annum initially, reducing to £0.25-0.35billion as shorter lived assets become fully amortised (3) Assuming closing of the transaction on 31 March 2007, no proceeds from thesale of the 5.6% listed direct interest in Bharti and no material movement inforeign exchange since September 2006 -ends- For further information: Vodafone Group Investor Relations Media RelationsTelephone: +44 (0) 1635 664 447 Telephone: +44 (0) 1635 664 444 Notes to Editors About Vodafone Vodafone is the world's leading international mobile communications group withoperations in 25 countries across five continents and over 200 millionproportionate customers by the end of January 2007, as well as 36 partnernetworks. For further information, please visit www.vodafone.com About Hutch Essar Hutch Essar is a leading Indian telecommunications mobile operator with 23.3million customers at 31 December 2006, representing a 16.4% national marketshare. Hutch Essar operates in 16 circles and has licences in an additional sixcircles. In the year to 31 December 2005, Hutch Essar reported revenue ofUS$1,282 million, EBITDA of US$415 million, and operating profit of US$313million. In the six months to 30 June 2006, Hutch Essar reported revenue ofUS$908 million, EBITDA of US$297 million, and operating profit of US$226million. Up until January 2006, Hutch Essar had licences in 13 circles, of which ninehave 900 MHz spectrum. In January 2006, Hutch Essar acquired BPL, thereby addingthree circles, each operating with 900 MHz spectrum. In October 2006, HutchEssar acquired Spacetel, adding six further licences, with operations planned tobe launched during 2007. The results of Hutch Essar are prepared in accordance with Hong Kong FinancialReporting Standards which may differ in material respects from the accountingprinciples applied by Vodafone. Important information For illustrative purposes an exchange rate of £1:US$1.95 has been used. All company data relating to Hutch Essar is based on Hutch Essar information.Financial information for the year to 31 December 2005 and half year to 30 June2006 has been translated using an exchange rate of US$1:HK$7.8. Vodafone's expected pro forma net debt at 31 March 2007 is calculated byreference to net debt at 30 September 2006 of £20.2 billion, and adjusting forcash flows since that date, consisting of £1.2 billion of interim dividendpayments, net cash impact of other acquisitions and disposals of £3.1 billion,net debt impact as a result of the Hutch Essar acquisition of £6.7 billion andfree cash flow during H2 FY2007 of £1.7-2.2 billion (derived by reference toFY2007 guidance of £4.7-5.2 billion and H1 FY2007 FCF of £3.0 billion). Market data is based on information from the Cellular Operator Association ofIndia ("COAI") and the Association of Unified Telecom Service Providers of India("AUSPI"). ROIC is defined as return on invested capital, calculated as unlevered free cashflow divided by the acquisition enterprise value. Enterprise value calculation US$bn £bn(7) ------------------------------------------------------------------------- Hutch Essar 100% Enterprise Value 18.80 9.64 Hutch Essar 100% Net Debt (4) (1.33) (0.68) Hutch Essar 100% Equity Value 17.47 8.96 Hutch Essar 67% Equity Value (5) 11.70 6.00 Holdco Net Debt(4),(6) (0.63) (0.32) ------------------------------------------------------------------------- Consideration paid by Vodafone to acquire 67% of Hutch Essar 11.08 5.68 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Hutch Essar Net Debt (4) 1.33 0.68 Holdco Net Debt (4) 0.63 0.32 ------------------------------------------------------------------------- Vodafone assumed Net Debt 1.96 1.00 ------------------------------------------------------------------------- (4) Estimated as at 31 January 2007(5) Vodafone economic interest of 66.4% with remaining economic interests held by local partners(6) Holdco refers to holding companies of HTIL owning shares in Hutch Essar(7) Using an exchange rate of £1:US$1.95 for illustrative purposes Other matters This press release does not constitute, or form part of, any offer or invitationto sell, or any solicitation of any offer to purchase any security in anyjurisdiction, nor shall it (or any part of it) or the fact of its distributionform the basis of, or be relied on in connection with, any contract thereafter. Information in this press release about the yield on shares cannot be reliedupon as a guide to future performance. Cautionary statement regarding forward - looking statements This press release contains certain "forward-looking statements" within themeaning of the Private Securities Litigation Reform Act of 1995 with respect toour expectations and plans, strategy, management's objectives, futureperformance, costs, revenues, earnings and other trend information, includingstatements relating to expected benefits associated with the transactionscontemplated herein, plans with respect to these transactions, and expectationswith respect to long-term shareholder value growth and the actions of creditrating agencies. Forward-looking statements are sometimes, but not always,identified by their use of a date in the future or such words as "anticipates","aims", "due", "could", "may", "should", "will", "expects", "believes","intends", "plans", "targets", "goal" or "estimates". By their nature,forward-looking statements are inherently predictive, speculative and involverisk and uncertainty because they relate to events and depend on circumstancesthat will occur in the future. There are a number of factors that could cause actual results and developmentsto differ materially from those expressed or implied by these forward-lookingstatements. These factors include, but are not limited to: regulatory approvalsthat may require acceptance of conditions with potential adverse impacts; riskinvolving our ability to realise expected benefits associated withthe transactions referred to herein; the ability to formalise, on mutuallyacceptable terms and conditions, the arrangements with Bharti relating toinfrastructure sharing; the impact of legal or other proceedings; the risk thatARPUs may decline or may decline more dramatically than expected; the risk thatcredit rating agencies downgrade or give other negative guidance with respect toour debt securities which may increase our financing costs; and the risk that,upon completion of the acquisition of the controlling interest in Hutch Essar,we discover additional information relating to its business leading torestructuring charges or write-offs or with other negative implications. In addition to the factors noted above, please refer to documents Vodafone GroupPlc has filed with, or otherwise furnished to, the US Securities and ExchangeCommission (the "SEC") under the US Securities Exchange Act of 1934, includingthe Annual Report on Form 20-F for the year ended 31 March 2006 and subsequentlyfurnished Form 6-Ks (which are available at the SEC's Internet site (http://www.sec.gov), for additional factors, risks and uncertainties that could causeactual results and developments to differ materially from the expectationsdisclosed or implied within the forward-looking statements made herein. Noassurances can be given that the forward-looking statements in this release willbe realised. All written or oral forward-looking statements attributable toVodafone Group Plc, any members of Vodafone Group or persons acting on ourbehalf are expressly qualified in their entirety by the factors referred toabove. Vodafone Group Plc does not undertake, and specifically disclaims, anyobligation to update or revise these forward-looking statements, whether as aresult of new information, future developments or otherwise. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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