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Hutch Essar Expands, Scraps IPOHutch Essar Expands, Scraps IPO

Indian mobile operator receives licenses to go national, but it's scrapping IPO plans following dispute between Hutchison and Essar

November 24, 2006

3 Min Read
Hutch Essar Expands, Scraps IPO

Hutchison Essar will soon be armed with new licenses allowing it to expand across India, but not everything's going to plan for the mobile operator. (See Hutch Essar Receives Licenses.)

The company has received a Letter of Intent from India’s Department of Telecom for licenses in six additional regions. It plans to have its network up and running in those new areas during 2007, extending its services from 16 to 22 of the country’s 23 regions and joining Bharat Sanchar Nigam Ltd. (BSNL) , Bharti Airtel Ltd. (Mumbai: BHARTIARTL) and Reliance Communications Ltd. (RCom) as a national operator.

Analysts at Lehman Brothers recently noted that the larger carriers are engaged in a “land grab” to protect market share as regional carriers look to expand their networks nationwide. (See Indian Carrier Capex on the Rise.)

Regional operator Idea Cellular Ltd. was also awarded a Letter of Intent on Monday for two new licenses, including the coveted Mumbai region. (See Indian Mobile Set to Spread and Birla's Big IDEA for India.)

But while Hutchison Essar plows ahead with network expansion, it has reportedly scrapped plans for an IPO that would have raised money for capital investment. The carrier restructured its ownership in March with a view to going public before the end of the year. (See Hutchison Essar Preps IPO.)

Hutchison Essar was one of several Indian mobile carriers looking to cash in on demand for telecom stocks and use the money for network expansion. IDEA Cellular and Spice Telecom have also announced plans to go public, in a market that has seen share prices for Bharti and Reliance rise around 40 percent in the space of a few months. Analysts have suggested Hutchison Essar could have a market valuation of around $10 billion.

The listing is a casualty of an ongoing spat between the carrier’s owners -- majority shareholder Hutchison Telecommunications International Ltd. (NYSE: HTX) and its joint venture partner Essar Teleholdings -- over management issues.

The dispute came to a head over control of BPL Mumbai, a mobile operator that Essar acquired last year. It reached the Mumbai High Court in August, and the companies are now engaged in arbitration. (See Hutch, Essar Battle Over JV.)

Egyptian carrier Orascom Telecom , which just weeks ago expressed interest in acquiring Hutchison Telecom International (the emerging markets arm of Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY)), has removed itself from the fray and is considering selling part of the stake it already holds in the company.

In reporting its quarterly results last week, Orascom noted that it has a 19.3 percent stake in HTIL but retains a place on the company’s board (and that of Hutchison Essar) as long as its share stays above 12 percent. "In light of current relative market valuations," it said, "Orascom Telecom continues to review all financial options, including a partial sale, for optimising value from its stake subject to retaining its existing corporate governance and other rights."

By selling up to a 7.3 percent stake Orascom stands to make a tidy profit while holding on to its ownership rights. The company acquired its holding in HTIL in December 2005 at a price of HK$11 per share, for a total of HK$10.1 billion (US$1.3 Billion). (See Orascom Buys Hutch Stake.) HTIL's shares currently trade at around HK$16.

Orascom has a 10 percent indirect stake in Hutchison Essar, and its interest in acquiring HTIL as a way to increase that stake has contributed to the tension between Hutchison and Essar Teleholdings, since Essar objects to Orascom’s investment on security grounds. Both Essar and India’s security agency have expressed concern to the government that Orascom also has operations in Pakistan.

Dennis Lui, CEO of HTIL, told a conference call of investors in August that the company hoped the conflict would be settled "amicably" and that it would have no impact on plans to take Hutchison Essar public. But Canning Fok, managing director of Hutchison Whampoa, has now told Reuters: "When you have disagreements you don’t go listing."

— Nicole Willing, Reporter, Light Reading

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