Vodafone/Essar: Vodafone’s list of woes in India keeps getting longer. The UK-listed telco already faces stiff competition in the country and is fighting tax authorities over $2 billion of disputed claims. Now it has fallen out with its joint venture partner Essar over the family-controlled group’s desire to back part of its 33 per cent investment in Vodafone Essar into a closely-held investment firm.
As part of the UK telco’s aggressive $11 billion push into India in 2007 which brought the pair into partnership, Vodafone granted Essar an option either to sell its entire shareholding for $5 billion or sell between $1 billion and $5 billion worth of Vodafone Essar shares to Vodafone at an independently-appraised fair market value. The option expires in May.
Essar now wants to list 11 per cent of the joint venture that it holds through privately owned Essar Telecommunications into a vehicle called India Securities Limited, which has a market capitalisation of just $320 million. By doing so, a market value, of sorts, would be put on the joint venture. Vodafone says that only five per cent of the shares of ISL, post the merger, will be freely traded. Small trades could prompt big price moves.
The plan suggests that Essar, which has borrowed against its holding, wants a partial exit and is trying to inflate valuations. After all, a price tag of $5 billion for a full exit looks generous given that shares Indian telcos have plummeted in the past three years. Rival Reliance Communications has lost 60 percent of its value in that time. A similar decline for Vodafone Essar would value Essar’s 33 per cent stake at $2 billion.
Vodafone clearly fears that putting a market value on the joint venture could influence any independent assessment, and that - in these circumstances - it could be misleading. The Indian courts will make the final decision on whether Essar can proceed. If Vodafone fails to stop the listing, it could bump up the cost of its already-expensive Indian adventure. But questions about the relevance of the illiquid security are now firmly on the agenda. And that is where they should be.