Big concessions for Essar in Vodafone deal

Shareholders' agreement announced, Ravi Ruia on Vodafone Plc board.

The Ruias of Essar have acquired significant concessions from global telecom major Vodafone, even as it announced the much-debated shareholders' agreement in New Delhi today.

These include a favourable put option, a seat for Ravi Ruia on the Vodafone global board, veto rights, a comprehensive right of first refusal (ROFR), and the promise to use Essar's proposed national and international long-distance infrastructure as well as assets of Essar Infrastructure Ltd, a specialised telecom tower company.

With an eye on becoming the leading mobile player in the country "" it is currently India's fourth-largest mobile service provider "" Vodafone-Essar has drawn up a $5 billion investment plan for the next two and a half years.

For Indian consumers, the new partnership also plans to offer global benefits like cheaper roaming rates on Vodafone networks in 25 countries, a rock bottom rate for Vodafone handsets, and new entertainment services.

Meanwhile, Vodafone's application to the Foreign Investment Promotion Board is to be taken up at a specially convened meeting on March 20. Vodafone Chief Executive Officer Arun Sarin clarified that the company had submitted all the requested information.

Under the new partnership agreement, the Ruias have the option to sell their 33 per cent shareholding to Vodafone in three to four years for $5 billion "" a discounted price over the valuation of their shares based on what the UK telecom major paid to Hutchison (an enterprise value of $18.8 billion) for its 52 per cent equity stake. This values the Ruia stake at over $6.2 billion.

Ravi Ruia, who has been appointed chairman of Vodafone-Essar with Sarin as vice-chairman, clarified that the shareholders' agreement is an "option, primarily to protect them from a downside".

He added that the value of the company would only grow as the agreement also provides the Ruias another option "" to sell a part or all of its stake to Vodafone based on an independent valuation.

Sources said the agreement also incorporates various "veto rights" (similar to the earlier agreement with former partner Hutchison Telecom International Ltd) to the Ruias on issues such as decisions on M&As, annual capital outlays, raising fresh capital, getting into new business, amongst others.

Sarin also cleared any doubt on the contentious issue of the ROFR. He stated that the first right to buy shares will lie with each other if Vodafone or Ruias wanted to sell.

Significantly, he ruled out any initial public offering plans for the next two-three years, Sarin added.

On the possible merger of BPL "" the Mumbai mobile operator owned by the Ruias "" with Vodafone Essar, Sarin said they may look at some solutions even though the matter is under arbitration between Vodafone-Essar and the Ruias.

Despite a memorandum with Bharti "" under which Vodafone-Essar's long-distance calls would be routed through Bharti's network "" sources said Vodafone has agreed to utilise Essar's proposed long-distance infrastructure. Similarly, Essar will have the first right to offer tower-related infrastructure through Essar Infrastructure.

However, Sarin and Ruia clarified that Essar Infrastructure will be treated as any other company and not as a "preferred partner".

TALKING POINTS

The Ruias have an option to sell their 33 per cent equity at $5 billion to Vodafone after three or four years, or sell part or the entire stake at a price to be valued independently.

Ravi Ruia, vice-chairman, has been promised a position on the Vodafone global board

Vodafone-Essar to invest $5 billion in two and a half years to become India's leading telecom company.

A comprehensive first right of refusal and veto rights on key decisions agreed to

Promise to use Essar's proposed long distance infrastructure and assets of Essar Infrastructure, the newly-incorporated tower company.

Cheaper roaming rates for Vodafone-Essar customers in Vodafone networks in 25 countries. Cheap Vodafone mobile phones bundled with minutes