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CASE STUDY OF MERGER OF VODAFONE AND HUTCHINSON
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INTRODUCTION
In an increasingly open global economy, where old prejudices against foreign ‘predators’ and old
fears of economic colonization have been replaced by a hunger for capital, Mergers and
Acquisitions (M&A) are welcome everywhere.
In human aspects of M&As we used a not-too-original distinction between mergers, acquisitions
and joint ventures. M&As represented a ‘marriage’, while joint ventures meant ‘cohabiting’.
Although mergers and acquisitions are generally treated as if they are one and the same thing,
they are legally different transactions. In an acquisition, one company buys sufficient numbers of
shares as to gain control of the other—the acquired company. Acquisitions may be welcomed by
the acquired company or they may be vigorously contested.
There are several alternative methods of consolidation with each method having its own
strengths and weaknesses, depending on the given situation. However, the most commonly
adopted method of consolidation by firms has been through M&As. Though both mergers and
acquisitions lead to two formerly independent firms becoming a commonly controlled entity,
there are subtle differences between the two. While acquisition refers to acquiring control of one
corporation by another, merger is a particular type of acquisition that results in a combination of
both the assets and liabilities of acquired and acquiring firms. In a merger, only one organization
survives and the other goes out of existence. There are also ways to acquire a firm other than a
merger such as stock acquisition or asset acquisition
The Vodafone-Hutch deal is one of the largest M&A deal executed by overseas firm in Indian
subcontinent. Today Vodafone business in India has been successfully integrated into the group
and now has over 44 million customers, with over 50 per cent pro forma revenue growth.
Revenues increased by 50 per cent during the year driven by rapid expansion of the customer
base with an average of 1.5 million net additions per month since acquisition
In today’s volatile market, where major M&A deals are showing negative growth or companies
are looking for Government Bailout money, Vodafone acquisition of hutch is a major contributor
to its revenue .While India’s revenues grew by 29.6 percent other APAC countries posted far
lower growths at 10 percent in Egypt, 7 percent in Australia and 3 percent in New Zealand at
VODAFONE
Vodafone is a mobile network operator with its headquarters in Newbury, Berkshire, England,
UK. It is the largest mobile telecommunications network company in the world by turnover and
has a market value of about £75 billion (August 2008). Vodafone currently has operations in 25
countries and partner networks in a further 42 countries. The name Vodafone comes from Voice
data fone, chosen by the company to “reflect the provision of voice and data services over mobile
phones.
Vodafone Essar is owned by Vodafone 52%, Essar Group 33%, and other Indian nationals, 15%.
On February 11, 2007, Vodafone agreed to acquire the controlling interest of 67% held by Li Ka
Shing Holdings in Hutch-Essar for US$11.1 billion, pipping Reliance Communications, Hinduja
Group, and Essar Group, which is the owner of the remaining 33%. The whole company was
valued at USD 18.8 billion. The transaction closed on May 8, 2007.
HUTCH-ESSAR
Hutch Essar was a leading Indian telecommunications mobile operator with 23.3 million
customers at 31 December 2006, representing a 16.4% national market share. Hutch Essar
operates in 16 circles and has licenses in an additional six circles. In the year to 31 December
2005, Hutch Essar reported revenue of US$1,282 million, EBITDA of US$415 million, and
operating profit of US$313 million. In the six months to 30 June 2006, Hutch Essar reported
revenue of US$908 million, EBITDA of US$297 million, and operating profit of US$226
million.
Up until January 2006, Hutch Essar had licenses in 13 circles, of which nine have 900 MHz
spectrum. In January 2006, Hutch Essar acquired BPL, thereby adding three circles, each
operating with 900 MHz spectrum. In October 2006, Hutch Essar acquired Spacetel, adding six
further licenses, with operations planned to be launched during 2007
IMMEDIATE CHALLENGES
Hutch is going to be a tough battle ahead as the world’s largest mobile operator (by revenues)
tries to woo the price-conscious Indian consumer. Vodafone is targeting 100 million Indian
subscribers in three years (Hutch has 24.41 million at present). That’s half its current subscriber
base across 27 countries.
But getting there means adding between 1.5 million and 2 million subscribers every month.
While Hutch has been adding around 1 million subscribers a month, market leader Bharti has
been adding 1.75 million. Vodafone needs to exceed Bharti’s net subscriber additions to be the
leader in three years. Second, it needs to tap rural India in a big way. Vodafone has earmarked an
investment of $2 billion over the next couple of years to strengthen its presence here. The
agreement with Bharti fits in perfectly to tap the hinterland
JUDGEMENTS
The facts clearly establish that it would be simplistic to assume that the entire transaction
between HTIL and VIH BV was fulfilled merely upon the transfer of a single share of CGP in
the Cayman Islands. The commercial and business understanding between the parties postulated
that what was being transferred from HTIL to VIH BV was the controlling interest in HEL.
HTIL had through its investments in HEL carried on operations in India which HTIL in its
annual report of 2007 represented to be the Indian mobile telecommunication operations. The
transaction between HTIL and VIH BV was structured so as to achieve the object of
discontinuing the operations of HTIL in relation to the Indian mobile telecommunication
operations by transferring the rights and entitlements of HTIL to VIH BV. HEL was at all times
intended to be the target company and a transfer of the controlling interest in HEL was the
purpose which was achieved by the transaction. Ernst and Young who carried out a due diligence
of the telecommunications business carried on by HEL and its subsidiaries have made the
following disclosure in its report: -
"The target structure now also includes a Cayman company, CGP Investments (Holdings)
Limited. CGP Investments (Holdings) Limited was not originally within the target group. After
our due diligence had commenced the seller proposed that CGP Investments (Holdings) Limited
should be added to the target group and made available certain limited information about thecompany. Although we have reviewed this information, it is not sufficient for us to be able to
comment on any tax risks associated with the company." (Emphasis supplied).
The due diligence report emphasizes that the object and intent of the parties was to achieve the
transfer of control over HEL and the transfer of the solitary share of CGP, a Cayman Islands
company was put into place at the behest of HTIL, subsequently as a mode of effectuating the
goal.
The true nature of the transaction as it emerges from the transactional documents is that the
transfer of the solitary share of the Cayman Islands company reflected only a part of the
arrangement put into place by the parties in achieving the object of transferring control of HEL to
VIH BV. HTIL had put into place, during the period when it was in control of HEL, a complex
structure including the financing of Indian companies which in turn had holdings directly or
indirectly in HEL. In consideration call and put options were created and the benefit of those
options had to be transferred to the purchaser as an integral part of the transfer of control over
HEL. Hence, it is from that perspective that the framework agreements pertaining to the Analjit
Singh and Asim Ghosh group of companies and IDFC have to be perceived. These were
agreements with Indian companies and the transaction between HTIL and VIH BV takes due
account of the benefit of those agreements.
The price paid by VIH BV to HTIL of US $ 11.01 Billion factored in, as part of the
consideration, diverse rights and entitlements that were being transferred to VIH BV. Many of
these entitlements were not relatable to the transfer of the CGP share. Indeed, if the transfer of
the solitary share of CGP could have effectuated the purpose it was not necessary for the parties
to enter into a complex structure of business documentation. The transactional documents are not
merely incidental or consequential to the transfer of the CGP share, but recognized independently
the rights and entitlements of HTIL in relation to the Indian business which were being
transferred to VIH BV.
We began the record of submissions by adverting to the contention of the Petitioner that if any of
the shares held by the Mauritian companies were sold in India, there would be no liability to
capital gains tax because of the Convention on the Avoidance of Double Taxation between India
and Mauritius. The crux of the submission is that the entire transaction in the case is subsumed in
the transfer of a share of an upstream overseas company which exercised control over Mauritian
companies. As we have noted earlier, it is simplistic to assume that all that the transactioninvolved was the transfer of one share of an upstream overseas company which was in a position
to exercise control over a Mauritian company. The transaction between VIH BV and HTIL was a
composite transaction which covered a complex web of structures and arrangements, not
referable to the transfer of one share of an upstream overseas company alone. The transfer of that
one share alone would not have been sufficient to consummate the transaction. The transaction
documents are adequate in themselves to establish the untenability of the Petitioner's
submissions.
The submission of VIH BV that the transaction involves merely a sale of a share of a foreign
company from one non- resident company to another cannot be accepted. The edifice of the
submission has been built around the theory that the share of CGP, a company situated in the
Cayman Islands was a capital asset situated outside India and all that was transferred was that
which was attached to and emanated from the solitary share. It was on this hypothesis that it was
urged that the rights and entitlements which flow out of the holding of a share cannot be
dissected from the ownership of the share. The purpose of the discussion earlier has been to
establish the fallacy in the submission. The transfer of the CGP share was not adequate in itself
to achieve the object of consummating the transaction between HTIL and VIH BV. Intrinsic to
the transaction was a transfer of other rights and entitlements. These rights and entitlements
constitute in themselves capital assets within the meaning of Section 2(14) which expression is
defined to mean property of any kind held by an assessee.
Under Section 5(2) the total income of a non-resident includes all income from whatever source
derived which (a) is received or is deemed to be received in India or (b) accrues or arises or is
deemed to accrue or arise to him in India. Parliament has designedly used the words "all income
from whatever source derived". These are words of width and amplitude. Clause (i) of Section 9
explains the ambit of incomes which shall be deemed to accrue or arise in India. Parliament has
designedly postulated that all income accruing or arising whether directly or indirectly, (a)
through or from any business connection in India or (b) through or from any property in India; or
© through or from any asset or source of income in India or (d) through the transfer of a capital
asset situate in India would be deemed to accrue or arise in India. Where an asset or source of
income is situated in India or where the capital asset is situated in India, all income which
accrues or arises directly or indirectly through or from it shall be treated as income which is
deemed to accrue or arise in India