The Essar Group, which has 33 per cent in Vodafone Essar, has attacked its partner, UK-based Vodafone Plc, for allegedly attempting to force it out of the company to be able to own all the equity in the Indian telecom arm, by buying the Essar stake at an “artificially depressed value”.
Vodafone has alleged that Essar might be involved in insider trading and hadn’t made proper disclosures to their shareholders regarding amalgamation of two Essar-controlled companies. The Essar Group hit back today, saying they’d already rejected an offer from Vodafone Plc to buy out their entire 33 per cent stake in Vodafone Essar Ltd.
Essar has alleged the objections raised by Vodafone on the proposed reverse merger of Essar Telecommunications Holding Pvt Ltd (ETHPL) into a listed entity, Indian Securities Ltd (ISL), in which ETHPL has a 75 per cent stake, “is to prevent the discovery of the fair market value of Vodafone Essar”. ETHPL holds 11 per cent stake in Vodafone Essar, while another 22 per cent is held through Essar Telecom Ltd. It has also alleged that “Vodafone is abusing the legal process to prevent discovery of fair market value” of Vodafone Essar.
Vodafone Plc said the put option was up to Essar to exercise. “If Essar does not wish to exercise its entire 33 per cent, the value attributed to the percentage stake it wishes to sell will be determined by investment banks appointed to assess Vodafone Essar’s Fair Market Value,”it said.
Essar said it wanted to list Vodafone Essar by offering its shares through an initial public offer last year. Alleging: “Vodafone ensured that the IPO did not go through and no market value could be established.” Their executives say while under their agreement either partner could go for an IPO and offer their shares to the public, this would not have been possible without cooperation from Vodafone Plc and was scuttled.
Arbitration clause
The Essar Group and the UK telecom company will now have to start the process under their agreement to appoint three merchant bankers to determine the fair market value of their shares, as they will be only selling part of the equity. Both will appoint one merchant banker each of their choice and the third would be a neutral banker. The average price determined by the three would be taken as the fair value of the company.
Essar argues that “If the market value being discovered by the merger were to be manipulated and artificial, as Vodafone claims, the investment banks would naturally ignore that value when making their determination.”
More From This Section
It says that under the agreement in 2007, the Essar Group had a choice. It could sell its entire stake of 33 per cent for $5 billion by May this year or could sell a part of the equity but at a price to be determined by the two.
According to sources involved in the deal, Essar contends that based on the fall in market capitalisation of other listed telecom entities such as Bharti Airtel, the drop between 2007 (when Vodafone bought out stake in the joint venture from Hutchison) and now was not more than five per cent. Based on the same premise, the valuation of the 33 per cent stake in 2007 for the Essar Group was $5.7 billion. So, even taking into consideration a fall of five per cent, the value of these shares would currently be about $5.3 billion.