Setback for Vodafone as Essar enters fray

Vodafone's ambitions in India suffered a blow yesterday after it emerged that India's Essar had launched a bid to buy out its partner in Hutchison Essar, the country's fourth-largest mobile telephone operator.

Vodafone's interest in Hutchison Essar emerged before Christmas and it admitted last week that it was considering launching a bid to acquire a controlling stake in the operation.

However, reports from India yesterday said Essar had tabled a bid of its own, valuing the business at $18bn (£9.2bn). Essar's ambitions have been backed by a $10bn line of credit from Morgan Stanley and Citigroup.

Vodafone had already attracted several rivals, who have been jockeying for position in recent weeks.

They have been told by Frank Sixt, Hutchison Whampoa's finance director, that the Asian conglomerate would only entertain offers "well in excess" of $14bn for the business. An offer of $13.5bn from private equity firm Texas Pacific and Maxis, a Malaysian mobile operator, has already been rejected.

Other potential bidders include Reliance Communications, the number-two mobile operator, which has joined forces with Blackstone, the private equity firm.

Essar's surprise move is understood to have been made in the past few days. Its officials are believed to have previously held talks with Vodafone about the UK company's intentions.

Essar's offer is the only firm bid on the table and its executives are expected to hold talks with Hutchison officials Hong Kong on Tuesday.

The company has pre-emption rights over Hutchison's shares, enabling it to take control as long as it is prepared to match the highest bid for the company.

Essar is controlled by the Ruia brothers, Shashi and Ravi, who are respectively chairman and vice chairman. They are listed as members of India's 40 richest businessmen.

Hutchison shares rose sharply after it gave confirmation that it had been approached by various parties regarding a possible sale of its stake in Hutchison Essar.

Investors have been excited at the news that the stake was becoming the subject of an auction. Hutchison believes it can call the shots in negotiations because of the potentially huge growth prospects in the mobile Indian market. The country has just 130 million users but a population of more than one billion.

There have been worries among UK investors that Vodafone might overpay to win the auction for a controlling stake in Hutchison Essar. However, they were eased yesterday with Essar appearing to hold by far the strongest hand thanks to its pre-emption rights.

Vodafone's shares finished yesterday up 1p at 143p. The company already has limited exposure to the market through its 10 per cent stake in Bharti Airtel, the biggest operator, although its prospects of taking control of that business are seen as "slim".

They would have to be sold should Vodafone take control of Hutchison Essar, and it would need to find partners because of Indian laws limiting the size of its holding to 74 per cent. Neither Hutchison nor Essar were prepared to comment yesterday.

Essar's other interests include steel, construction and oil. The company is based in Mumbai, having moved from Chennai where the brothers' father, Nand Kishore Ruia, started in business. Shashi Ruia was only 24 when he took control of the organisation following the early death of his father.

The family's business roots are in shipping and exports. It then made a move into construction, building most of the country's ports.

Essar entered the telecom marketplace in the 1990s. Its bid is likely to have the support of the Indian government, which has recently voiced concerns about telecommunications companies falling into foreign hands because of "national security issues".

The company hit a sticky spot in 1999 when it became the first Indian business to default on a foreign loan. After the default, Essar sought help from Indian financial institutions, asking them to buy the debt, but the talks broke down.

However, restructuring and an improvement in steel prices persuaded debt holders to accept rescheduled terms.