A bidding war appears set to unfold in coming weeks as Vodafone prepares to make a formal offer to buy a leading Indian cell carrier, a potential acquisition that has drawn the attention of several other high-profile mobile phone companies and private equity firms.
The bid for Hong Kong-based Hutchison Whampoa's controlling stake in India's Hutchison Essar is important to Vodafone as it helps the British carrier gain a presence in one of the world's fastest growing markets: India is now adding 5 million new mobile phone connections every month, more than China.
For now, Vodafone's biggest competition for the prize is Reliance Communications, India's second-largest mobile phone company, which would become the market leader if its plans to acquire Hutchison Essar, which is unlisted, come through.
Vodafone's move is also strategic for its Chief Executive Arun Sarin, who has come under fire from shareholders for lackluster share prices and criticism that the world's largest mobile phone company lacks a credible strategy for further growth.
So, a week after the company made its interest public, Sarin - whose family's roots are in India - flew to New Delhi to hold talks with top government officials and potential partners.
Doing Business in India
Winning the confidence of government officials is crucial to such deals in India, where ministers and politicians have a reputation of meddling in merger and acquisitions, especially when foreign companies are involved.
"When it happens, it will be a large transaction. We would like it to be smooth," Sarin told reporters after a meeting last week with Indian Finance Minister P. Chidambaram.
Vodafone emerged as a front runner earlier this month after making an approach that reportedly valued all of Hutchison Essar at between $17 billion and $18 billion, which would make it the biggest-ever corporate takeover in Indian history.
Sarin said his company plans to make a formal takeover offer in early February.
A bidding war appears inevitable, however.
Hours after Sarin's meetings with Indian officials last Wednesday, the board of Reliance Communications authorized its chairman, Anil Ambani, to raise funds and "take all necessary steps" to counter Vodafone.
A day later, Ambani, one of India's most influential businessmen, met most of the officials who had held talks earlier with Sarin.
Reliance Communications' current market share is close to 20% and most of its phones are based on CDMA technology. The company wants to scale up its cellular phone services based on GSM - the other dominant technology - which is what Hutchison-Essar offers to nearly 20 million customers.
Media reports have said Reliance Communications could come with a bid that values all of Hutchison Essar at about $20 billion.
"They are going to do what it takes to get it," said Romil Shetty, a telecommunications analyst with the consulting firm KPMG.
"At the moment, it seems to be Vodafone vs. Reliance, but there are some more companies that might get into the fray later," Shetty said.
Among other interested parties are Malaysia's Maxis Communications Bhd. and the Hinduja brothers - Britain-based Indian businessmen who previously held a stake in Hutchison Essar.
Media reports have said several high profile private equity firms, including U.S.-based Texas Pacific Group and Blackstone Group, have also been exploring tie-ups with possible bidders.
Besides rival bidders, Vodafone must be ready to wade through complex Indian rules and regulations, including a 74% cap on foreign investment in telecom ventures.
In the case of Hutchison Essar, the story gets further complicated because of the number of stakeholders involved.
Hong Kong-based Hutchison Whampoa holds 52% stake in the company, while its India-based associates hold 15%. Hutchison Whampoa wants to sell out and its associates have said they are ready to tag along.
India's Essar Group holds the remaining 33% and it isn't clear if it would like to sell its stake or join up with the company that buys Hutchison Whampoa's stake.
Some media reports have said Essar believes it has the first right to buy Hutchison's shares in the joint venture and that the company would try to make most out of the situation, either by buying out Hutchison's stake or getting a good price to sell out completely.
Shetty believes Essar is ready to get a good price and get out. "I don't think they are serious about staying in the telecom business," he said.
During his visit, Sarin sought to preempt any potential trouble from Essar by calling it is a "natural ally" in the transaction.
Also, Sarin is bound by Vodafone rules prohibiting the company from overpaying for an acquisition, which any successful bidder for Hutchison Essar may have to do. So Sarin would have to justify to the board any such premium.
According to a recent report by insurance giant ING, a bid that values Hutchison Essar at $18 billion represents a premium of almost 100%.
"We are looking at a market where the subscribers could double in five years. It makes sense for Vodafone to pay a good premium," said Emeka Obiodu, a London-based analyst at the research firm Global Insight. "That doesn't mean the management will give (Sarin) a blank check."