Essar begins price discovery of its Vodafone stake

In about a fortnight, you could bet on the shares of Vodafone.
Surprised? Ok, make that indirectly and partially.

Shares of Vodafone Essar Ltd, the third-largest telecom operator in India by subscribers, will be available on stock exchanges if brothers Shashi and Ravi Ruia complete the amalgamation of Essar Telecommunications Holdings Pvt Ltd (ETHPL) with India Securities Ltd, another group firm, listed on the Bombay Stock Exchange.

Through ETHPL, Essar holds about 11% stake in Vodafone Essar, and the proposed amalgamation will pave the way for India Securities to own the stake.

The listing of one of the Essar group holding firms is to enable price discovery of Vodafone Essar shares — because an initial public offering of Vodafone Essar looks distant at present.

The Essar group has often stated that it has three options: a complete sale of 33% it holds in Vodafone Essar; a partial stake sale; or, status quo.

The group has five more months — till May 10 — to make the call.
The amalgamation is aimed at unlocking value and “market assessment of the telecom assets of the Essar Group,” a notice convening the meeting of equity shareholders said.

India Securities is an illiquid share traded on the Bombay Stock Exchange. About 39,000 shares changed hands last Friday.

According to documents filed with the Madras high court, where the amalgamation proposal awaits approval, the merger will help India Securities diversify into the “infrastructure sector, as stakeholder in leading telecom company in India.”

The Essar group has wrested assurance from Vodafone Group Plc, wherein the world’s largest mobile telephone company has agreed to a floor price of $5 billion for its one-third stake in the company.

An Essar group spokesperson declined to respond to an email query from DNA.

In 2007, Vodafone acquired 67% ownership from Hutchison Whampoa Ltd in its Indian telecom operations, which was then called Hutchison Essar Ltd, for about $10 billion.

The Essar group, which owned the remaining 33% stake, negotiated with Vodafone a put option, which guaranteed a floor price of $5 billion for its holding in the company.

The notice to shareholders said the amalgamation will enable the shareholders of the transferee company (India Securities) to participate in the telecom assets and enable liquidity for the shareholders of the transferor (ETHPL) company.

It will result in the creation of a listed entity with a large asset base and net worth, thereby increasing its capability for future growth, the notice added.

The process is expected to be completed towards the end of this month. Promoter stake post the amalgamation would be approximately 75%.

Notices were placed by the two Essar group firms in Hindu Business Line on January 5.

Essar’s put option is alive for a year. It came into effect on May 8, 2010, with an execution window that is open till May 8, 2011.

The Essar group owns its equity stake in Vodafone Essar through two firms — 11% through ETHPL and the remaining 22% through Essar Telecom Ltd, which is based overseas.

Post the merger, the paid-up capital of India Securities is expected to rise four-fold from Rs20 crore now to Rs87 crore. The merger is expected to be completed by January 31.    

India Securities, which offers consultancy services to group firms is currently valued by the market at Rs1,280 crore, with 75% owned by its promoters and about 20% owned by minority investors.

Based on the $5 billion floor price guaranteed by Vodafone, the value of asset being moved to India Securities is worth about $1.67 billion, or about Rs7,700 crore, about seven times In`dia Securities’ current valuation.

However, if the price discovery process determines a higher value, the Indian group will command a higher value for its stake in Vodafone Essar, as per a new agreement hammered out by the two partners.

The timing of the merger comes when telecom shares are under a bearish grip in India. High borrowing costs and competition have resulted in margins going barebone for telecom firms.

India Securities traded in the BSE in a 52-week high/low range of Rs150.30/ Rs12.32, respectively. The shares lost 0.77% to Rs64.15 on Friday.