Vodafone eyes Hutchison India as Reliance circles

LONDON/MUMBAI (Reuters) - Mobile phone giant Vodafone Group Plc is considering buying a controlling interest in India's Hutchison Essar, raising the prospect of a $13-billion-plus bid battle with Reliance Communications for the operator.
UK-based Vodafone said on Friday the process was at an early stage, but its board believed the mobile market in India has great potential.
A move for Hutchison Essar would be consistent with its strategy of seeking selective acquisitions in developing markets, it said.
Confirmation of Vodafone's interest could draw out interest from Reliance, India's second-largest mobile services provider, which was considering moving on its smaller rival only after Vodafone revealed its strategy, The Economic Times reported.
Reliance, controlled by the Anil Ambani group, is looking at a possible bid in tandem with private equity group Blackstone, a source familiar with the situation told Reuters on Thursday.
Reliance could not be immediately reached for comment.
Vodafone underlined its ambitions to expand in emerging markets at an investor day earlier this month and analysts have long expected it to step up its presence in India, the world's fastest-growing mobile phone market.
"They've got to do it (expand in markets such as India), but ultimately it comes down to what they pay. We would certainly support them considering it," said Richard Marwood, fund manager at AXA, a shareholder in Vodafone.
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Foreign investors are limited to owning 74 percent of Indian mobile operators, so Vodafone would need a local partner.
Hutchison Essar, India's number four mobile services provider, is 67 percent-owned by Hong Kong tycoon Li Ka-shing's Hutchison Telecommunications International Ltd. India's Essar group, which holds the remainder, has first right of refusal if Hutchison decides to exit.
Vodafone, the world's biggest mobile operator outside China, could seek to buy Hutchison Telecommunications' stake and keep Essar as its local partner, analysts said.
Hutchison Telecommunications said on Friday it has been approached by various parties regarding a possible sale of its interests in Hutchison Essar but no agreement has been entered into.
Vodafone currently has a 10 percent stake in India's number one player Bharti Airtel and there is a one-year non-compete clause if it sold that stake. But a source familiar with the situation said Vodafone was unlikely to be constrained by that agreement.
If it secures a deal for Hutchison Essar it would be the biggest acquisition since Indian-born Arun Sarin took over as chief executive in July 2003.
Axa's Marwood said Vodafone, which faced criticism a year ago for overpaying for Turkey's Telsim, would find greater support for this deal after it recently showed it was making progress in Turkey faster than expected.
He said the investor mood toward company had also improved in recent months, as evidenced by a rising share price.
Vodafone shares have risen by a quarter since August, but by 0955 GMT they were down 1 percent at 142-1/2 pence, one of the weakest UK blue-chips, valuing the company at 75 billion pounds.
Reliance shares rose 1.4 percent to 467.5 rupees.
Hutchison Essar's board met in Mumbai on Friday but its managing director told Reuters the meeting was a routine one unrelated to any potential bid for the company.
Indian newspapers have said Malaysia's Maxis Communications -- which last year bought 74 percent in India's Aircel -- and Egypt's Orascom Telecom were also potential suitors for Hutchison Essar.
India's GSM carriers reported a record 5 million new subscribers in November, including more than 1 million for Hutchison, taking total users in the country beyond 143 million.
Hutchison has a market share in India of about 16 percent, behind Bharti's 21.5 percent, Reliance's 20.4 percent and state-run Bharat Sanchar Nigam's 16.5 percent.

© Reuters 2006.