Big names compete for India's 2-cents-a-minute caller

Verma, a chauffeur in Mumbai, formerly Bombay, who makes $3 a day, pays only for the calls he dials so he prefers to hang up and wait for you to call back. It is a routine technique for the millions of low-income consumers who have made India the world's fastest-growing market for cell phones.

As investors and corporations maneuver to take over Hutchison Essar, one of India's big providers of mobile phone service, Verma's tactic offers a cautionary tale about the Indian boom: To make cellular service widely accessible in this nation of 1.1 billion people, a company has to practically give it away.

Callers in the West typically pay more than $500 a year for their phones, according to Wireless Intelligence, a data provider based in London. Indians pay just $110, or about $9 a month.

Yet the struggle for Hutchison Essar is emerging as one of the largest corporate takeover battles in Indian history. Hutchison could overnight become one of Asia's largest companies if it fetches an expected valuation of $16 billion to $20 billion compared with revenue of $1.58 billion in the trailing four quarters ended in June 2006.

India's second-largest mobile operator, Reliance Communications, has persuaded Western private equity firms like the Blackstone Group and Texas Pacific to help underwrite its bid. Essar executives have said that Citigroup, Morgan Stanley and other investment banks will extend billions of dollars in financing to buy out the stake in Hutchison Essar of Li Ka-shing, the Hong Kong billionaire who is the patriarch of Hutchison Whampoa, a wide-ranging industrial and shipping conglomerate.

And the Vodafone Group of Britain, the world's largest cell phone operator based on revenue, is betting close to a tenth of its $167 billion market value for control of the Indian company, on the assumption that India's expanding commerce will help offset slower growth in Europe.

This week, Vodafone continued to be the front-runner, with the company and its allies pushing aggressively for a takeover. The European Union's trade commissioner, Peter Mandelson, telephoned the Indian commerce minister, Kamal Nath, on Sunday evening to emphasize its wish that India be open to foreign bids for Hutchison Essar.

Vodafone's chief executive, Arun Sarin, who grew up in India, was headed for India by Wednesday to meet with Nath.

Mandelson wanted to ensure that "any outside, non-Indian company get a fair shot," the commissioner's spokesman, Peter Power, said. Hutchison Essar is a venture of Hutchison Whampoa and the Essar Group, a privately listed Indian company that is a minority partner. Li wants to sell the two-thirds stake his group controls, which includes holdings by two investors loyal to his firm.

And despite a price that is many multiples higher than in any previous Indian deal, anyone with money seems to be angling for a share of the pickings.

"Where is there a market today that could transform the nature of a company, and where is there a company that is available?" said Asim Ghosh, Hutchison Essar's managing director. "It's the value of scarcity."

There has been talk in the market of other possible bidders, including the Hinduja Group of India, Verizon Wireless in the United States and NTT DoCoMo of Japan. But executives in Mumbai are said to be skeptical there will be such bids.

Fast growth is the attractionclick me for companies to India, but many who have come acknowledge the challenges. Multinational giants, including General Motors, Unilever and Coca-Cola, have learned they had to make money with cheaper offerings. GM, for instance, had to change its approach in Asia, focusing on small, low-cost cars instead of gas-guzzling sport utility vehicles.

"We are learning how to make money selling small cars," David N. Reilly, president of GM Asia Pacific, said in August, "and we haven't generally been good at that in the past."

Price cuts vs. market share
In other industries, McDonald's cut its initial prices in India by 25 percent to reach further down the economic pyramid, offering a 15-cent servings of soft ice cream; Coca-Cola introduced Little Coke, a miniature bottle costing the equivalent of 11 cents; and Nokia recently offered a handset for less than $50.

With the competition for cell phone callers, whichever suitor wins Hutchison Essar will find itself competing in one of the cheapest mobile phone markets in the world.

The average price of a call on Hutchison's network is 2 cents a minute, which includes both local and more expensive long-distance calls. That contrasts sharply with the 40 cents a minute on NTT DoCoMo in Japan. Telefonos de Mexico gets 13 cents a minute, according to Wireless Intelligence.

Yet for the equivalent of $23, an Indian can buy a lifetime package of unlimited incoming calls. The cost of handsets, too, has dropped. Verma paid $130 when he bought his bare-bones Nokia three years ago; today, a comparable model is one-third that.

But India makes up for cheap prices with volume and breakneck growth. Hutchison and Vodafone's British operations underscore the differences.

Vodafone reported 16.3 million subscribers against Hutchison Essar's 15.4 million in the first quarter of 2006, and it generated 1.2 billion pounds, or $2.3 billion, in revenue compared with Hutchison Essar's $436 million, according to Wireless Intelligence. It took Hutchison four customers to make as much money as Vodafone earned on one.

Yet for Vodafone and other mobile providers based in the West, the future looks relatively bleak. In the 12-month period through March 2006, Vodafone's British business signed up a million new customers, while Hutchison added 7.6 million. Even with its pared-down prices, Hutchison was running a pretax operating profit margin of 34 percent, a couple of points higher than Vodafone's 32 percent.

For companies like Vodafone, whose growth has leveled off in its core markets, India offers a fresh start. There is more than one cell phone for every man, woman and child in Western Europe. But in India, there is one cell phone for every eight people, and millions are eager to rectify the imbalance.

Heather Timmons contributed reporting from London.