Rival bidders Vodafone and Reliance Communications are studying the possibility of taking an indirect route to acquire control of Hutchison Essar to skirt the right of first refusal claimed by the Essar group.

According to a Wall Street Journal report, both telecom majors are considering acquiring Hutchison Whampoa's 49.8 per cent stake in Hutchison Telecommunications International. HTIL holds 67 per cent of Hutchison Essar.

Hutchison Whampoa's efforts to sell its stake in Hutchison Essar have been stalled by joint venture partner Essar, which holds one-third in India's fourth-largest telecom company. Essar has been claiming the right of first refusal for any sale.

• The race for Hutch-Essar

Industry sources said the purchase of Hutchison Whampoa's stake in HTIL would have the advantage of keeping the Essar group outside the ambit of the deal. However, some analysts say Essar's first right of refusal could still hold true even if the indirect route was adopted.

This route could raise other issues. First, the acquisition of a big chunk in the Hong Kong-listed company would bring along businesses in other countries, namely Hong Kong and Israel.

Hutchison Telecommunications also has some fixed-line assets. "It is not certain whether taking over businesses in Hong Kong and Israel will make sense for Reliance and Vodafone," analysts said.

Secondly, Vodafone and Reliance will have to face the problem involving the right of first refusal with Egypt-based Orascom. Hutchison Whampoa has an agreement with Orascom Telecom Holdings SAE to not sell its stake until December 2007.

"We have a right of first refusal after that," Orascom Chief Financial Officer Aldo Mareuse, who is a member of the HTIL board, was quoted in the Wall Street Journal as saying.

Mareuse told the Wall Street Journal that Orascom was also potentially interested in buying Hutchison's stake in Hutchison Essar but has not yet bid.

In November, before the bidding for Hutchison Essar began, Orascom said it was considering a partial sale of its stake in HTIL to cash in on the rising prices of the HTIL stock. However, Orascom now wants to retain its existing rights, including first refusal for future stake sales by Hutchison Whampoa.

Vodafone has reportedly offered $16.5 billion for Hutchison Essar during an initial round of non-binding bids, and a direct purchase remains the company's preferred strategy. The size of Reliance's initial non-binding bid is not known.

It is learnt that the HTIL board will meet towards the end of this month to discuss the bids for its stake in Hutchison Essar. The sale is expected to be closed by mid-February.

In addition to these two companies, the Hinduja group is also keen to acquire the majority stake in Hutchison Essar. While Vodafone and Reliance have examined the books of Hutchison Essar, the Hinduja group is expected to do so shortly. The Essar group is also interested in buying its foreign partner.

The race for Hutch-Essar