Ruias hold stronger hand in Hutch stake sale

If Hong Kong tycoon Li Ka-shing wants to sell his majority holding in Hutchison Essar to a third party, he will first have to deal with the Essar group's first right of refusal. An attempt to bypass Essar may result in legal wrangles.

Hutchison Essar is India's third largest mobile telecom service provider with over 20 million subscribers.

Industry observers recall how the Essar group's objections stymied Egyptian telecommunications major Orascom's attempt to gain an indirect entry into Hutchison Essar by buying into Hutchison Telecommunications International. Orascom later diluted its holding when it realised no headway could be made.

"Any move, direct or indirect, that provides a third party entry into Hutchison Essar will be contested in court," said experts.

Hutchison holds a 52 per cent stake in Hutchison Essar and the Ruias-promoted Essar group 33 per cent, while the rest is held by Analjit Singh of Max India and Hutchison Essar CEO Asim Ghosh.

There are unconfirmed reports that private equity fund Blackstone and buyout fund Texas Pacific will soon start takeover talks for the Indian operations of Hutchison Telecommunications International and that Anil Ambani's Reliance Communication could be a party to it.

A recent Morgan Stanley study valued Hutchison Essar at $11 billion.

A sale involving 52 per cent of its equity will be Asia's largest private equity deal.

Reliance Communication stock fell 1.97 per cent on the Bombay Stock Exchange even as the benchmark Sensex dropped 1.23 per cent. Shares in Hutchison Telecommunications rose 1.1 per cent today on the Hong Kong stock exchange.

Analysts said Hutchison Telecommunications was contemplating raising funds by selling its assets in India because the planned initial public offering of Hutchison Essar had not materialised. Li Ka-shing needs money for his company's struggling third generation telecommunications operations.

They also said Hutchison Essar could make a good fit for Reliance Communications, although the company has dismissed the reports, not the least because it will make the company India's biggest mobile operator by a huge margin.

According to an industry source, Reliance Commmunications has added about 27 million subscribers in just three years of operations. Its code division multiple access (CDMA) network has a capacity of 35 million subscribers and the company is adding over 1.35 million subscribers every month.

At this rate, the company will run out of capacity by the middle of next year.

In the past, Reliance Communications talked about beefing up its presence in global system for mobile communications (GSM). It already runs a small GSM-based operation in eight regions with about 3 million subscribers through a subsidiary, Reliance Telecom.

Reliance has applied for GSM spectrum in 21 of India's 23 circles under a unified service access license and is likely to tender 75 million GSM lines for these circles.

"Since the allocation of spectrum will take place by the middle of next year or even later, an acquisition would be a good move," explained an analyst.