The Essar group will go ahead with its decision to sell 33 per cent stake in Vodafone Essar for $5 billion in cash despite the order of the Madras High Court. The court had yesterday said that Vodafone did not have any legal basis to object to the merger between Essar Telcommunications Holding Pvt Ltd (ETHPL) and Indian Securities Ltd, a listed company promoted by the Essar group.
The Essar group holds 10.97 per cent in Vodafone Essar through ETHPL and wanted the merger to determine the market value of its holdings in the joint venture. Vodafone, however, had challenged the merger as it feared this could inflate the value of Essar's stake.
A source close to the Essar group said, "As we have already exercised the put option as part of the agreement for a 22 per cent stake and Vodafone has exercised a call option for the residual 11 per cent stake at a total consideration of $5 billion, there is no clause in the agreement to go back on it. It's a done deal. Had the judgment come before we had exercised the option, we could have determined the value of the shares through the market, but that option is not there anymore."
The source said in many ways Vodafone has succeeded in getting its way, as the market price could have been much higher than the $5 billion, which the two have agreed on. The telecom company, with over 130-million customers, expects the deal to be closed by the end of this year.
In 2007, Vodafone, which had bought out Hutchison, had given options to Essar, which included 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 three valuers — two from each company and one accepted by both sides. But in January, the two partners started quibbling with Vodafone objecting to Essar’s plan to place a part of its 33 per cent stake – 10.93 per cent — in India Securities. 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.
Vodafone, however, might have to rope in an Indian partner to meet the FDI guidelines under which foreign direct investment up to 74 per cent is allowed in the telecom sector. It might also look at the option of going in for an initial public offering. 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.
Of Essar’s 33 per cent stake, 10.97 per cent is with 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.
