Piramal picks up another 5.5% in Vodafone

Vodafone has a lot to rejoice about these days. Barely two weeks after India’s second largest telecom service provider won the long-drawn out tax war for Rs11,000 crore against the I-T department, Piramal Healthcare on Saturday announced plans to buy an additional 5.5% stake in Vodafone India. The transaction, for Rs3,007 crore, values Vodafone’s India business at Rs54,675 crore. In August, Piramal had bought 5.5% stake for Rs2,900 crore.

This sale signifies the official exit of the Essar group as a shareholder in Vodafone India. Out of Essar’s total 33% stake which it held in the joint venture with Vodafone, 22% was bought back by Vodafone, and now the remainder has been acquired by Piramal.

Piramal Healthcare has been sitting on a stash of Rs10,000 crore after selling its milch cow formulations business to the US-based Abbott Laboratories in 2010.

Vodafone said the transaction offers various exit mechanisms for Piramal, including through participation in a potential IPO and sale of stake to Vodafone.

Ajay Piramal, head of Piramal Healthcare, or other officials were not available for comment.

“Piramals want to diversify into sectors that have more potential than pharma. That was one of the reasons for selling the formulations business to Abbott,” said a pharma industry expert who did not wish to be named.

Ranjit Kapadia, senior vice-president at Centrum Broking said in the pharma business, valuations are stretched and hence a player like Piramal have to lookout for sectors that can yield higher profits.

Kunal Bajaj, partner and director-India, at Analysys Mason, a telecom consultancy, said the Vodafone IPO is revolving around Piramal’s equity stakeholding, hence they agreed to pick up a stake as a pre-IPO partner.

“In a typical agreement of this kind, Piramal can liquidate some of its stake in the IPO that is set to be launched in a year and get a quick return on investment. This would also provide the healthcare major with an exit strategy if they get a good valuation, which could then be pumped into research funding for drug development and discovery which they have been investing in,” Bajaj said.

Some see this as the beginning of Piramal’s long-term interest in the telecom industry. Hitesh Sharma, tax partner with Ernst & Young, said while for Vodafone, this is the case of a strategic partner being replaced by a non-strategic partner for the joint venture, the current state of affairs may be reversed in the long term in case Vodafone is willing to dilute more stake —and Piramal is seeking to buy. “If that is the case, the Piramal Group could then seriously invest in the telecom sector, even going so far as to become another telecom player.”

Gartner Research estimates India’s telecom sector is set to exceed $30 billion in revenues by next year, growing at a compounded annual rate of 12.5%.