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Hutch, Essar Battle Over JV

Emerging markets carrier Hutchison Telecommunications International Ltd. (NYSE: HTX) saw a 48 percent increase in turnover during its first half, driven by growth in India, but all is not well with its Indian operations. (See Hutchison Telecom Reports H1.)

HTIL and India's Essar Teleholdings have been increasingly at odds over their joint venture -- mobile carrier Hutchison Essar -- and last week the Bombay High Court banged some heads, telling the two to resolve their disputes through an arbitration panel or out-of-court settlement.

The latest conflict centers on Hutchison Essar's acquisition of BPL Mobile Communications Ltd. (BPL Mumbai) from Essar Teleholdings. In September, the companies agreed that Hutchison Essar would take control of BPL Mumbai along with BPL Mobile Cellular Ltd. (BPL Cellular) and Essar Spacetel. Essar acquired the BPL operations last July. (See Hutch Essar Completes BPL Buy.)

The integration of BPL Cellular went off without a hitch, and the BPL Mumbai deal was scheduled to be completed on July 31. But instead, Essar Teleholdings terminated the agreement, on the pretext that HTIL failed to get regulatory approval from the Department of Telecom (DOT) and therefore has failed to meet the terms of the merger agreement. Essar has retained control of BPL Mumbai and offered to return the cash.

The DOT quickly distanced itself from the conflict, saying its approval was not necessary for the merger to go ahead and any problems with the deal are internal. HTIL, which initiated the court proceedings to try and salvage the merger, has released a statement arguing that since it's paid for BPL, Essar should transfer the shares and leave it to secure the approval.

At HTIL's request, the government processed the application to merge Hutchison Essar and BPL's operating licenses for Mumbai last week, but it has yet to approve the stake sale.

Essar thumbed its nose at Hutchison Friday, independently announcing plans to invest 1 billion Indian Rupees (US$21.48 million) to ramp up BPL's network expansion, adding 100 new cell sites by September and launching new value-added services.

Essar, which holds a 33 percent stake in Hutchison Essar, has been angling for a bigger say in the management of the company -- particularly since Egyptian carrier Orascom Telecom took an indirect stake through Hutchison last year. (See Orascom Buys Hutch Stake.) It has raised security concerns about that arrangement, as Orascom reportedly has connections to Pakistan, and tensions have been simmering ever since.

Adding to the resentment, Essar recently lost out to HTIL on a bid for the Hindju family's 5.11 percent stake in Hutchison Essar. HTIL now holds a 67 percent stake in the joint venture. (See Hutch Buys More of Essar.)

On Thursday, the Bombay Court ordered an arbitration panel be set up within 30 days to handle the dispute and issued an order restraining Essar from selling BPL to a third party. Potential buyers are already circling as Mumbai is the most sought-after city for mobile carriers seeking to expand. (See Indian Mobile Set to Spread.)

India's third largest mobile carrier, Hutchison Essar reported its turnover increased to HK$7.09 billion (US$911.36 million) in the first six months of 2006, up 50.9 percent from HK$4.69 billion (US$602.86 million) in the same period last year. Subscriber numbers doubled to 17.5 million during that period. The operator now accounts for 45 percent of HTIL's turnover.

Dennis Lui, CEO of HTIL, told a conference call of investors that the company hopes to settle the issues with Essar "amicably," and that the conflict will have no impact on its plans to take Hutchison Essar public "when conditions are ripe to do so." (See Hutchison Essar Preps IPO.)

— Nicole Willing, Reporter, Light Reading

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