Vodafone to ask I-banks to value Essar's stake

British telecom major Vodafone today said it would appoint investment banks to determine the fair value of its telecom business in India, Vodafone Essar.

Responding to a query from an Indian TV channel, Vodafone said such an appointment would be in accordance with the contracts Vodafone and Essar signed in 2007. The two groups are fighting over the valuation of Essar’s 33 per cent stake in Vodafone Essar, the second largest telecom company in India.

Last week, Vodafone alleged Essar had violated insider trading regulations after the latter proposed a reverse merger of one of its privately held companies, Essar Telecom Holdings, with a vehicle called Indian Securities. Of Essar’s 33 per cent stake in Vodafone Essar, 11 per cent is with Essar Telecom Holdings. Vodafone wrote a letter to the Securities and Exchange Board of India, asking for an investigation into the merger. The move, it says, would restrict the number of freely traded shares. It believes Essar wishes to inflate the value of its holdings before making an exit, partial or otherwise, in the joint venture.

In an interview to a TV channel today, Prashant Ruia, managing director of the Essar Group, said they were looking at an open and transparent way to fairly determine the value of their investment. On which basis, he said, they’d decide whether to stay invested or divest from the company.

“It is not open to Essar now to circumvent the agreements signed previously by introducing ISL as a benchmark. Due to a lack of disclosure and the illiquid nature of ISL, Vodafone is concerned that the value of ISL could be misinterpreted as a fair market value of Vodafone Essar,” was Vodafone’s response.

When Vodafone acquired the 67 per cent stake in the telecom venture from Hutchison for $10 billion, Essar was given a put option, wherein it could exit the company through two routes. In the first one, Essar can sell out entirely to Vodafone for a fixed and pre-determined amount of $5 bn. In the alternative, Essar can sell between $1 bn and $5 bn of shares to Vodafone, and the valuation would be independently appraised, based on a fair market price. Last year, Vodafone raised the price of put option by around Rs 3,500 crore. It has to be exercised by May 2011.

Even before the spat came into the public eye, Essar was known to be unhappy with their investment in the joint venture, as they felt it paid too much to acquire 3G licences. Vodafone paid Rs 11,617 crore to get the3G licences, in nine circles.