Hutch Essar more valuable than Hutchison & Essar

It’s a queer situation. Hutchison Telecom International (HTIL) has pegged the floor price of its 67% stake in Hutch Essar at $14 billion. However, its total market capitalisation at the Hong Kong stock exchange is $11.5 billion. This creates an unusual situation, where the perceived value of a company’s asset is more than its total market cap.

And this, despite the fact that the HTIL stock has got a significant leg-up since news of the possible sell-out broke out. In the past month, the HTIL stock has risen nearly 10%.

The other joint venture partner, Essar, too is benefitting significantly as a result of the bidding war. While the total market capitalisation of the listed Essar group companies on the Indian bourses is Rs 12,000 crore, the Essar group’s holding in Hutch Essar of around 33% has been pegged at $7 billion, or Rs 32,000 crore.

Just what is causing this anomaly in terms of valuation? While some bidders say the fair value of Hutch Essar is around $16-17 billion, some analysts provide justification for the high valuations. They reason that the sale is not of assets but the controlling stake in a running company. The price being demanded takes that into account and adds the possible earnings over the next couple of years to the total price. In the case of Hutch Essar, the price is said to be close to 8 times EBITDA. This implies the sellers want eight years’ earnings as premium to sell their stake in the company.

Another reason given for the high valuation is the relatively better position of the company in terms of average revenue per user (ARPU). ARPU is the yardstick by which the performance of any telecom player is measured and Hutch seems to be doing better than its competitors in this respect. Some analysts also say that HTIL’s market cap of $11.5 billion might not have included the full value of its stake in Hutch Essar in the past due to limited information on the valuation of the telecom company. The underperformer outlook on HTIL could also have resulted in depressed share prices.