UBS joins play for Hutch

Anil Ambani-led consortium may make offer by end Dec.

The Reliance-Anil Dhirubhai Ambani group is giving final touches to a consortium by roping in UBS for arranging the debt to buy out Hutchison's equity stake in its Indian joint venture Hutchison Essar.

Sources said the group was expected to make a pitch for the stake to Hong Kong-based Hutchison in the last week of this month.

The consortium, merchant bankers said, was raising $2-4 billion as debt. The balance $10 billion will be funded by cash from its partners and Anil Ambani's group.

The offer is expected to be based on an enterprise value of $12-14 billion. It is entirely up to Hutchison whether it sells its stake in the Indian joint venture.

While UBS will arrange the debt, Caryle Group, private equity fund Blackstone and buyout funds such as Texas Pacific and Kohlberg Kravis Roberts (KKR) together with Reliance Communications will provide the cash to buy the equity.

A Reliance Communications spokesperson declined to comment on the issue.

The consortium's requirement for funds to take 67 per cent is much lower but it wants enough resources in case the Ruias also want to sell.

Reliance Communications, for instance, has around $1.7 billion of cash reserves and has just taken a syndicated loan of $1 billion for general corporate purposes, which can be used for funding the deal.

It could also raise resources from the sale of equity in its proposed tower company, which has been floated by the group after spinning off its mobile tower unit infrastructure into a separate company, valued at $4 billion. It is also expected to sell around 20 per cent equity in Flag Telecom, which will yield around $200 million.

Analysts said the biggest challenge was to structure the deal. Ambani's proposed buyout fund could be one vehicle for this acquisition, in which Blackstone, Carlyle and KKR would pick up stakes, said an analyst.

The Reliance consortium is not the only suitor for the Hutchison stake, if it decides to sell. Speculation that Qatar Telecom might buy equity from the Ruias in the joint venture were denied by the company.

Sources said Malaysian telecommunications company Maxis had also considered a buyout. The company had bought a 74 per cent stake in Aircel, which runs operations in Tamil Nadu and Chennai. It recently got the licence to operate in 14 new circles.

Its rollout may be delayed due to lack of spectrum availability. Buying into Hutchison will quickly make it a pan-India player. However, it may face regulatory issues on breaching the foreign direct investment limit in case of a merger of the two companies.

Merchant bankers said Egyptian telecom company Orascom, which already held equity indirectly in Hutchison Essar Ltd, might also be in the reckoning if it was able to convince the government that it posed no security threat. The Ruias have stalled the group's attempts to play a larger role in India by raising concerns about their operations in Pakistan.

The Ruias, too, have been talking to bankers to buy out their partner's stake. They could play a crucial role because they hold a 33 per cent stake and no one can operate the company without their comfort since they can stop any special resolution by the board. However, they may have to take a heavy debt burden on their books.