Vodafone starts due diligence on Hutch

Ruias have rights to tag along with Hutch in any sale.

UK telecom major Vodafone is likely to begin "due diligence" on Hutchison-Essar Ltd on Monday, with a team of over top 20 executives having flown in from London for the purpose.

Vodafone has zeroed in on accounting firm Ernst & Young and Delhi based legal firm Trilegal for assistance in the due diligence process.

Akshay Jaitley, a partner in the legal firm, confirmed that his firm had been chosen, though adding that other law firms had also been roped in.

When contacted in London, Vodafone spokesperson Bobby Leach declined comment. A top executive of Hutchison-Essar said he was unaware of the development. Vodafone and Reliance, besides the Ruias, are the key contenders for Hutchison's stake in Hutchison-Essar.

The Vodafone move comes at a time when documents pertaining to the shareholders' agreement have revealed that the Ruias have "tag along rights" in case Hutchison's shareholding in the joint venture falls below 40 per cent. These rights hold the key, given that differences have arisen between the Ruias and Hutchison on the question of "right of first refusal (ROFR)," which could jeopardise the sell-off.

Hutchison has 67 per cent equity in the venture through Hutchison Telecommunications International Ltd (HTIL) and its associates, with the rest held by the Ruias.

Under tag along rights, if the majority shareholder (Hutchison) chooses to sell its stake, the minority shareholder (the Ruias) has the right to be a part of the transaction and sell its stake concurrently.

Also referred to as a "co-sale right," it places the majority shareholder under a contractual obligation to include the holdings of the minority shareholder in the negotiations, so that it gets a fair price for its shares.

This means that Hutchison cannot sell its shareholding independently in case the Ruias also want their stake sold. However, the tag along rights come into play only if the Ruias decide to sell their stake.

The shareholders' agreement lays down two conditions on whose basis the right of first refusal (RoFR) can be granted to the Ruias.

It says: "HTIL shall grant Essar Teleholdings (ETH is the holding company of the Ruias) RoFR over sale of its shares in the holding company (the JV) if such sale (a) results in HTIL and any of its associated companies holding, in aggregate, directly or indirectly, less than 40 per cent of the issued share capital of the holding company and (b) is to a company or consortium which has any of the Indian business groups set out below holding a 10 per cent or more interest: (i)The Reliance Group of Companies (ii) the Bharti Group of Companies and (iii) the Tata Group of Companies."

According to Hutchison's interpretation, the clauses clearly state that the Ruias have no RoFR in case it sells its stake to Vodafone, other international telcos or buyout funds.

It is only applicable for sale to an Indian company, mainly Reliance Communications. However, the Ruias have contested this interpretation.

The agreement also clearly lays down the tag along rights enjoyed by the Ruias. The relevant clauses say: "HTIL will grant ETH Tag Along rights in respect of ETH's shareholding if HTIL or any of its associated companies sells its stake, or part thereof, in the holding company and such sale results in HTIL and any of its associated companies holding, in aggregate, directly or indirectly, less than 40 per cent of the issued share capital of the holding company."