Fresh war of words after court rejects plea against merger of Essar firms.
The war of words between Vodafone and Essar escalated on Thursday after the Madras High Court said Vodafone did not have a legal basis to object to the merger between Essar Telecommunications Holdings Pvt Ltd (ETHPL) and India Securities Ltd (ISL), a listed Essar company.
The Essar group owns 10.97 per cent in Vodafone Essar through ETHPL. It said it wanted to merge ETHPL with ISL to value its stake in Vodafone Essar.
Vodafone, however, challenged the merger, saying it might inflate the value of Essar’s stake in the joint venture. The two are fighting over the value of this stake.
People in the know say the court order may not have much impact as Essar has already exercised the put option for selling 22 per cent out of the 33 per cent it holds in Vodafone Essar to Vodafone at a value that was decided when the two had formed their joint venture.
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Armed by the court order, Essar took on its partner. “The objections filed by Vodafone were intended to delay the merger and prevent discovery of a fair market value of Vodafone Essar,” said an Essar spokesperson. “We have always believed that the fair market value of Vodafone Essar is higher than the underwritten value,” he said.
Essar and Vodafone had appointed Standard Chartered Bank, Goldman Sachs and UBS to arrive at a fair market value. Essar has always maintained that its share is valued at more than $5 billion.
Vodafone thinks this is inflated. Earlier this week, Chief Executive Vittorio Colao said the company had been cash-positive only since last year and the return on investment had been almost zero.
Responding to this, Essar said, “Vodafone is attempting to force Essar out of the company and own 100 per cent at an artificially-depressed value”.
VODAFONE DISAPPOINTED
A Vodafone Plc spokesperson told Business Standard: “Vodafone is disappointed that the Madras High Court did not feel it necessary to further investigate the merger. Vodafone believes the current disclosure to public investors in ISL is inadequate.”
After Essar decided to exercise the put option for its 22 per cent stake, Vodafone had said the call option for the remaining 11 per cent was triggered automatically.
“The ISL reverse-listing has no bearing on the underwritten options that are currently being exercised,” said the Vodafone spokesperson.
Sources in the know agree. Had the court approved the merger before it exercised the option, Essar could have used ISL as a valuation benchmark. Now, the market is likely to value ISL based on the call option value, fixed at $1.2 billion (for the 11 per cent stake).
Essar sources admit the court order has come too late for ISL shareholders to enjoy any upside.
Sources said the valuation exercise by the banks was not completed and Essar was forced to exercise the fixed price option as time was running out.
Vodafone says Essar opted for the option under no pressure or obligation.
BACKGROUND
The pact between Vodafone and Essar gives the Indian company a put option for its 33 per cent stake that it can sell to the UK company for $5 billion. The option expires in a few months.
The alternative is Essar selling shares worth $1-5 billion to Vodafone at a price determined by investment bankers.
People in the know say the court ruling will also have no bearing on approvals from the Reserve Bank of India, which may oppose the valuation structure that has been agreed for the put and call options.
The court also rejected the Mumbai I-T department’s plea against the merger. The department had said the Essar group owed it Rs 487.76 crore for 2008-09 and “recovery of this assessment may become a problem if the merger gets through”.
