The battle for Hutchison Essar has taken an interesting turn with the revelation that the partners of Hutch-Essar, India's fourth largest cell operator do not have a shareholder's agreement which lists out the rights and responsibilities of the warring groups. Relations between Hutchison Telecom and the Essar group of India will be key to the sale of Hutch's 67% stake in Hutch Essar.

To begin with, relations between Hutchison and Ruias of Essar group have never been cordial. Hutch and Essar have gone to the courts and the government several times in the last few years over what may look to the outsider as silly squabbles. The two partners fought over the acquisition of BPL Cellular last year, following which the much-hyped plans for the Hutch IPO in India was finally dropped. Before that, Hutchison and Essar quarreled over Orascom acquiring a stake in Hutchison Telecom International, which the Ruias claimed would create "national security" issues in India, since Orascom was an Egyptian company with extensive operations in Pakistan.
Dust has barely settled over that battle when a fresh row has been kicked up with Hutchison planning to sell its stake in its Indian operations with partner Essar.

To be fair to Essar, most of the time during their partnership, Essar has stayed away from the operations of Hutch. But they have fought fiercely whenever they felt their wishes were not being given due respect. Hutch, in India, has mostly been a foreign operation, with the Hong Kong parent looking after technology, marketing and development. Ruias never interfered with this part of Hutch-Essar.

What prompted Hutchison to think of quitting India, the world's most lucrative cellular market? Hutchison group chief Li K-shing has been known to develop businesses from scratch and grow them to full bloom, before cashing in on the business. Hutchison recently sold of its ports business at a huge profit, which it had built up from scratch. Li Ka-shing is known to have a keen eye for finding that exact peaking point when his businesses command maximum valuations. So, selling off its stake in Hutch-Essar may have been cold calculation for Hutch-Essar. But what about the Ruias?

Ruias of Essar stand to gain a stupendous amount depending on the final valuation of Hutch Essar. Now, Hutchison has already said that it won't be willing to sell its 76% holding in the Indian business Hutch-Essar for anything less than $14 billion. At the base price set by Hutchison Telecom, the enterprise valuation of Hutch-Essar works out to more than $21billion.

Remember that this is only a base price. Basically, Hutch is saying that yes, we'll sell out; but let's start talking from a minimum of $14 billion. Depending on the bidders' appetite, the value of Hutch-Essar may go up to even $25 billion.
And there is no shortage of bidders for Hutch-Essar. Reliance Communications of the Anil Dhirubhai Ambani Group, Ruias themselves and the Hinduja group are among the Indian aspirants in the race for Hutch. Among the foreign suitors are Vodafone of UK, Maxis of Malaysia and perhaps even Verizon of the US. However, each one has his own individual problems in buying out Hutch's Indian stake of 67%.

The problem is more complicated for Indian bidders than foreign ones. Let us explain. If a foreign company, say Verizon, agrees to buy the 76% stake from Hutchison for say $15 billion, it is rather easy. This is because Verizon can come in place of Hutch and run the company as a partner with Essar, just as Hutchison has been doing so far. Same with many other foreign bidders. Telecom rules in India stipulate that any telecom entity cannot have more than 74% foreign stake holding. So, for the Verizons and Vodafones, when they come in with the moneybags, Essar is already there as a partner. So, few headaches.

Things can be bit more complicated with Vodafone. This is because Vodafone is already present in India, through a 10% stake it holds in Bharti Airtel. According to India's rules, if you are a foreign company with 10% stake in an Indian telecom company, you cannot hold more than 10% in any other telecom company which operates in the same telecom circle. Since Bharti Airtel already has mobile operations in a large number of telecom circles -- including the ones where Hutch operates -- Vodafone cannot go ahead and buy the Hutch stake, since it will mean that Vodafone will hold 67% in Hutch as well as 10% in Bharti Airtel in the same telecom circle. So what is the way out? For Vodafone, Hutch is more valuable than Bharti Airtel. To smoothen its plans to buy Hutch, Vodafone has made clear its intention to sell the Bharti Airtel stake to buy Hutch. Bharti Airtel has already given its verbal okay for Vodafone to proceed with the stake sale. In any case, for Vodafone, the investment in Bharti Airtel was just a financial one -it never intended to run the company.

About Maxis of Malaysia. This company had already made a bid for Hutch's Indian operations, which was rejected since the price was low. However, it has not stopped the company from making a second bid -- this time at a higher price -- since the stakes are much higher now. India has the world's sharpest growth in mobile phone markets, and to miss an opportunity to enter this market may me the mistake the millennium. However, Maxis is also present in India through Aircel, where it holds 74% stake. Maxis, which now runs Aircel has put its rebranding plans for Aircel on hold, since it wants to see which way the wind turns before going ahead. If it turns out to be the winner in the Hutch lottery, Maxis can go ahead and merge the licences for the two companies (Aircel & Hutch) and then merge the companies and go for a joint rebranding.

Though finally it will all boil down to the pile of cash on the table, US firm Verizon is likely to face less procedural wrangles if the company throws its hat into the battle for Hutch Essar. This is because it does not have any operations in India, and hence does not have to bother with merging licences or selling existing stakes.

It is the Indian bidders which will have a messy time ahead. Reliance Communications has already said that it is clearly in the battle for Hutch. For Reliance Communications, already a leading player in the Indian telecom space, the Hutch sale is a godsend. Reliance, which operates its services under CDMA technology, has been thinking of expanding its network under GSM, for which it had called tenders. Anil Ambani, chairman of Reliance Communication has gone on record that he saw the future of GSM technology for mobile telephony. For Reliance, Hutch offers the perfect alignment - Reliance gets to expand its network, go GSM, and become India's No.1 telecom player at one go.

Becoming the largest player in any field has its obvious advantages. For one, you dictate the rules of the game. You set the tariffs. Others have little options other than meekly follow. For a crude comparison, a merged Reliance comm-Hutch will be to telecom what Reliance Industries has been to Indian petrochem refining for over two decades.

On a personal side, the combined value of Hutch-Reliance will be more than the value of the most-valued companies in the BSE Sensex. So, if and when a potential merged Hutch-Reliance goes public, it will command the largest market capitalisation of any Sensex stock - beating even Reliance Industries and ONGC. For Ambani, this will be one opportunity that he can't let go.

However, even Reliance won't find the going easy. First, money will be a problem, despite Anil Ambani's bravado that private equity funds are queuing up to support him. According to reports, Reliance has even offered to sell 15% of the stake in Reliance-Hutch, if the deal goes through. Yet, Ambani himself has gone on record that the valuation numbers being bandied about are too high.

Secondly, Reliance will have to merge the Hutch licence with its own if the deal goes through, since the rules on 10% stake-in-one-firm-in-one-circle will apply here. Moreover, rules stipulate that you can hold either less than 10% in a telecom company or 100% - nothing in between. So, this means that Reliance has no option but to buy the whole of Hutch - 100% - from Hutchison and from Ruias. Which means that unlike a foreign buyer buying 67% and running Hutch, Reliance will be forced to buy the whole company, obviously at a higher price. Also, Hutch-Essar did when they acquired BPL Mobile and BPL Cellular last year, Reliance will have to merge the licences and Hutch with itself if and when the deal goes through.

Ambani may also have to face another curious problem. A single Reliance-Hutch entity will become the Indian telecom monopoly. Though formation of a monopoly in itself is nothing illegal in India, the abuse of monopoly is. Indian regulators like the Competition Commission of India and the Monopolies and restrictive Trade Practices Commission will be keeping a keen eye on the merged Reliance-Hutch to see if indulges in anti-competitive behaviour.

This week also saw the entry of the Hinduja group in the race for Hutchison Essar. Hindujas have already signed a non-disclosure agreement with Hutch to evaluate the financials of Hutch Essar. A full-fledged due diligence is expected to begin only once the Hutch financial data is thoroughly studied. Hindujas, it may be recalled, earlier held slightly over 5% stake in Hutch Essar, which it sold to Hutchison Telecom in 2006. It seems the telecom growth prospects have made the Hindujas do a rethink.

The dark horse in the battle for Hutch may turn out to be the Ruias of Essar, who currently hold the balance 33% stake in Hutch-Essar. This area is a bit hazy, but till now, it was believed that Ruias held the "Right of First Refusal" in its shareholder's agreement with Hutch, which means that Hutch can't sell its 67% stake to anybody else if Ruias are willing to match the bid put up by anybody else. However, latest reports say that Hutch and Essar -shockingly - do not have a shareholders' agreement like in all joint ventures, but have run the company so under what is called a "term sheet" which merely listed out the responsibilities and rights of both partners. Apparently, there is not mention of any "Right of First Refusal" (ROFR) in this term sheet, which means that Ruias cannot throw a spanner in the works, even if they want to.

But do they? Ruias evinced their interest in the Hutch stake rather late. They are, however, in an enviable position. Suppose Reliance quotes a huge figure and Essar is willing to sell. Ruias stand to rake in oodles of cash with this just one deal. The Essar may group ears over Rs 20,000 crore, even with the current valuations. The more, the merrier.

And suppose they want to buy Hutch, as they have claimed. Financially, Ruias will find it easier than other Indian bidders. Why? Because unlike a Reliance or an Airtel which needs to buy 100% of the company to run it, Essar needs to raise resources only for the 67% which it does not hold now. Which means at a lower cost, the entire company is theirs.

Amid the flurry of activity, Vodafone has already kicked off its due diligence of Hutch-Essar. Vodafone, clearly the leader of the foreign pack, is in a hurry. For the UK company, faced with shrinking growth margins in Europe, future lies in emerging markets like India. For Vodafone, it is a matter of survival. For others, it is a matter of growth. For this one reason alone, Vodafone may tie up huge private equity funds to finance the deal. The days ahead are bound to be red-hot in deal street. Li Ka-shing must be smiling in his dreams.