Vodafone offers hand to Essar

My first preference is Essar, second, Essar, and third preference, Essar: Arun Sarin.

Three days after agreeing to acquire 67 per cent in Hutchison Essar, Vodafone CEO Arun Sarin made strong overtures to the Essar Group, the 33 per cent domestic partner in the joint venture.

"My first preference is Essar, my second preference is Essar and my third preference is Essar," Sarin told reporters today at his first post-acquisition press conference in India.

Earlier in the day, at an exclusive editors' meet, Sarin joked, "Today is Valentine's Day; I will send the Essars a bunch of roses!"

Sarin's statements come in the wake of widely reported dissatisfaction expressed by Ruia family sources of Vodafone's memorandum of understanding with its telecom rival Bharti Airtel for sharing network.

He, however, added that Vodafone would consider upgrading the shareholders' agreement if needed.

Fresh, upbeat and eloquent despite a hectic schedule that involved an analysts' conference in London on Monday and press meets at the 3GSM World Conference in Barcelona on Tuesday, Sarin emphasised that Vodafone's stake in Hutch-Essar was "a controlling interest."

Sarin was flanked by Paul Donavan, who heads Vodafone's emerging market and Asia-Pacific divisions, and Asim Ghosh, current chief of Hutch-Essar. Although minority shareholder Analjit Singh was present, there was no representative of the Ruias of Essar at either press meet.

Sarin, who described the controversy with Essar as "much ado about nothing," also endorsed Ghosh as CEO of Hutch-Essar, saying, "He has my vote."

In a separate statement, Donovan said the Pug, Hutch-Essar's talismanic dog, would stay because of the strong brand associations.

Sarin and his team are in the capital for two more days and he is scheduled to meet the Ruia brothers in Delhi tomorrow and, possibly, Bharti's Sunil Mittal. He will also meet Prime Minister Manmohan Singh tomorrow.

Meanwhile, Financial Times reported that Vodafone is reserving the right to walk away from its planned purchase of a controlling stake in Hutchison Essar if litigation seeking to thwart the deal is launched.

"A document filed with regulators by Hutchison Telecommunications International Ltd (HTIL), the Hong Kong listed company that has agreed to sell its stake in Hutchison Essar to Vodafone, reveals that the UK mobile group has sought to protect itself against the risk of protracted litigation," the report said.

When asked, Sarin said such clauses exist in all commercial contracts.

Bharti MoU not a contract: On the network and infrastructure-sharing agreement with Bharti-Airtel, in which Vodafone has a 10 per cent stake, Sarin said, "It is just an expression of intent. It will have to be fully vetted by all shareholders. It is something we intend to do in the future. The first thing is to close the transaction that could take three-four weeks."

However, Sarin was uncompromising on the issue of "controlling" the new operation. "Essar's 33 per cent interest is much better than 5 or 10 per cent, but it is not a controlling interest. But, we would like Essar to stay."

Sarin also made it clear that the Essar Group does not have the first right of refusal to buy its partner HTIL's stake in Hutch-Essar. "With respect to Vodafone, Essar does not have the right of first refusal. I cannot comment on their right of first refusal with respect to other parties," he told reporters.

Vodafone's "Plan B": Sarin also said Vodafone has a Plan B that it would put in place if Essar chooses to exit the company. Local minority partners like Asim Ghosh, Analjit Singh and IDFC, (who hold 15 per cent equity in Hutchison Essar among them) would increase their stake to 26 per cent, accounting for the mandatory Indian equity component.

Vodafone is also likely to subscribe to Essar's 22 per cent shareholding held overseas, if they exit, in an offshore India transaction.

Vodafone executives have said the impact of replacing Essar with local minority partners would mean the company "won't be able to get to a 100 per cent economic interest, but have a 26 per cent headline Indian interest as a consequence."

The Vodafone agreement with HTIL involves paying $11.08 billion for a 67 per cent "economic stake" that is actually a 52 per cent equity stake, giving it management control of the company.

The around 12.6 per cent equity shared between Asim Ghosh and Analjit Singh, through two investment companies under the existing HTIL structure, would be transferred to Vodafone through an existing call option that is already built in.

Among other details, Sarin made it clear that no firm decision has been taken on the board composition. If Essar stays on, he said, "Vodafone would slip into Hutchison's shoes in the existing board."

Apart from Essar's around one-third representation, the other nominees are Ghosh, Singh and officials from HTIL.

Sarin also said that Vodafone would invest $2 billion over the next two years. He also set a target of Vodafone displacing Bharti as the number one mobile operator.

"The target is to have 100 million customers and be number one." Hutch Essar has nearly 24 million users, roughly 16.5 per cent of the current mobile market.