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Essar exits Vodafone for $5 bn

BS Reporters  |  Mumbai/ Delhi 

Ruias exercise call option, valuing company at Rs 67,000 cr

The bosses in Vodafone’s headquarters in UK’s Newbury will surely be breathing easy, with the Ruias of Essar deciding to sell their 33 per cent stake in Vodafone Essar for $5 billion in cash.

The deal is expected to end the dispute between the two partners over the valuation of Essar’s minority stake in the company, which has 130 million subscribers and is the third-largest operator in India.

In a surprise move, Essar on Thursday decided to exercise its underwritten put option for a 22 per cent stake, which, Vodafone spokesperson said would automatically give them the right to exercise a call option for the residual 11 per cent stake, two months before the option window was to close.

An Essar spokesperson refused to comment saying it was bound by confidentiality obligations under its agreement with Vodafone.

In 2007, Vodafone granted options to Essar, giving it the right to sell its entire stake for $5 billion or to dispose of a part of the stake at a value arrived at by an independent entity.

But in January, Vodafone objected to Essar’s plan to place a part of its 33 per cent stake – 10.93 per cent to be precise — in India Securities, a small public company. Vodafone feared this would inflate the market value of Vodafone Essar.

A call option gives an investor the right but not the obligation to buy a stock, bond, commodity or any other instrument at a fixed price within a specific period. A put option gives the owner the right but not the obligation to sell a certain amount of an underlying security at a specified price within a fixed time.

The $5-billion deal values Vodafone Essar at $15.1 billion (around Rs 67,000 crore). This does not include any debt that Vodafone Essar has on its books, as the number is not available.

Vodafone, the world’s largest mobile operator by revenue, held 67 per cent in the company. It paid $11.1 billion for the stake in 2007 in what is till now the largest foreign direct investment (FDI) in India. It had valued the Indian business at $19.3 billion, which included over $1 billion debt.

The Vodafone Group’s published net debt figure includes the $5 billion it will pay to Essar. The exercise, said Vodafone officials, would be concluded by the end of 2011.

It is not clear to what extent Vodafone will have to divest stake through an initial public offer (IPO). The other option is for Indian shareholders in the JV — Analjit Singh and IDFC – to raise stakes marginally. Vodafone spokesperson Ben Padovan said Vodafone’s stake would go up to over 75 per cent after the deal.

“To maintain compliance with the Indian regulations, we could go for an IPO for the one per cent stake or scout for an Indian partner,” he added.

Out of the 67 per cent stake, Vodafone holds 42.4 per cent directly, while 24.6 per cent is held by the Indian entities of Analjit Singh and IDFC in which Vodafone is a minority shareholder. This 24.6 per cent stake is considered Indian.

At present, FDI norms allow a foreign entity to own 74 per cent stake directly. Out of the balance 26 per cent, a foreign entity can own up to 49 per cent, but the majority 51 per cent has to be in Indian hands.

Out of Essar’s 33 per cent stake, 10.97 per cent is with Indian entity Essar Telecommunications Holdings Pvt. Ltd (ETHPL), while the remaining 22.03 per cent is held by an overseas entity, the Mauritius-based Essar Communications (Mauritius) Ltd, another private company owned by the promoters.

Essar’s move to reverse-list ETHPL with a listed Essar group entity, India Securities Ltd (ISL), in January this year faced opposition from Vodafone and it was claimed the Ruias were wrongfully trying to extract a fair market valuation by spreading misinformation. The Ruias own a little over 74.22 per cent in ISL.

The case is in the Chennai High Court. But sources said for all practical purposes the matter was almost dead.

1996-1997: Ruias enter after a deal with C Sivasankaran. Essar gets Sterling Cellular & Aircel Digilink from Sivasankaran, who gets Tamilnad Mercantile Bank from the Ruias
1999-2000: Hutch Essar JV formed after Hutch acquires 49% in Sterling Cellular from Swisscom
2002:  Hutch-Essar bids successfully for 4th licence in AP, Karnataka, and Chennai
2003:  Essar transfers Aircel Digilink to Hutch-Essar JV
2005:  All entities under Hutch-Essar consolidated. This includes Hutchison-Max in Mumbai, Usha-Martin Telecom Calcutta and Fascel in Gujarat
2005:  Hutch-Essar acquires BPL (Maharashtra, TN, Kerala). BPL’s Mumbai circle also part of the deal, but goes into litigation
2005-06: Other minority shareholders, Max Group, Kotak Group & Hindujas, exit Hutch-Essar JV
2007:  Vodafone acquires Hutchison stake in Hutch-Essar JV for $11.1 billion, JV renamed Vodafone Essar
2011:  Essar exercises put option to exit JV  

With 771 million mobile subscribers in January, India is the world’s second-biggest market for mobile services. It is also the fastest-growing, with monthly subscriber additions averaging 19 million in 2010.

Vodafone has faced many challenges, from high spectrum costs, an ongoing dispute over tax and an increasingly conflicting relationship with its main Indian partner. Vodafone’s case is often cited as an example of a high-profile foreign company facing hostile environment after coming into India.

In May 2010, Vodafone took a hit on its market valuation in India by $3.70 billion due to fierce competition and escalating spectrum costs and signalled increasing frustration with the country.

The exit of the Ruias comes as good news for Vodafone, which is facing a tax claim of $2.5 billion on the 2007 deal. Vodafone has repeatedly insisted that no tax is due on the transaction.

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First Published: Fri, April 01 2011. 01:53 IST