Vodafone buys 33% from Essar at preset $5 billion

Vodafone Group Plc on Thursday announced it will buy an additional 33% stake in Vodafone Essar, India’s third-largest mobile phone operator with 131 million subscribers, after the Essar Group, its local partner, exercised an option to sell its stake.
That brought a four-year saga, which also saw the partners squabbling, to a close.

Under their terms of endearment signed in 2007, Vodafone had a one-year window between May 7, 2010, and May 8, 2011, to  buy back the 33% stake at a preset floor price of $5 billion.

Failing this, Essar was free to sell the stake to anyone, putting the world’s biggest mobile phone operator in an uncomfortable situation.

Thursday’s deal will raise Vodafone’s stake in the India venture to 75%, a percent more than what regulations allow, raising prospects of an initial public offering or entry of a strategic investor.

The Essar group took the first step to exit the joint venture after exercising a put option on a 22% stake it held in Vodafone Essar through its Mauritius-based companies.

This pushed Vodafone to exercise a call option it had to buy an 11% stake held by Essar Telecommunication Holdings Pvt Ltd, which, in turn, is currently merging with India Securities, a company listed on the Bombay Stock Exchange.

A put option is a contract that gives the seller the right, but does not impose an obligation, to sell a specified quantity of securities at an agreed price within a specified time frame. Conversely, a call option is a right to buy.

Vodafone saw the India Securities merger move as a red rag and believed that the valuation given to the closely held company was unrealistic because of its low floating stock.

For Vittorio Colao, Vodafone’s chief executive officer who succeeded Arun Sarin to the corner office, the deal would be satisfying because he was able to ensure that the Ruias got only the floor price prescribed in their 2007 agreement and not a pence more.

An investment banker for the Ruias had boasted after the 2007 deal that the put option ensured a floor price “with the lines for the ceiling yet to be drawn”.

But what the banker did not anticipate was the actions of former telecom minister Andimuthu Raja — which was to open the gates to eight new mobile operators. That, effectively, reduced the incumbents’ pricing power and valuations.

Standard Chartered Plc advised the Essar Group, Goldman Sachs advised Vodafone. Swiss bank UBS arrived at the valuation of the joint venture.

Vodafone has been cobbling funds to write the big cheque to the Ruia brothers of Essar.

Colao recently sold a $6.5 billion stake in China Mobile and is contemplating plans to exit from French mobile-phone operator
SFR, where it holds 44% stake.

In recent times, Colao took some tough decisions that included a $3.3 billion writeoff for the Indian unit, citing “intense price competition.”

Interestingly, after November this year, when the transaction is expected to be completed, Essar is free to have its own operations in telecom sector because there is no no-compete agreement between the two.

Essar is an equity holder in Loop Telecom, which has licence and spectrum to operate in almost all parts of the country.

“There is no agreement from our side that prevents Essar group from entering the telecom sector,” said Simon Gordon, a Vodafone Group spokesperson based in London.

While India’s apex investigating agency Central Bureau of Investigation alleges that Essar used Loop Telecom as a front to acquire licences and spectrum, Essar has maintained that it owns much less than 10% in Loop, with the rest being owned by Dubai-based Khaitans.

To be sure, I P Khaitan and Kiran Khaitan are brother-in-law and sister, respectively, of Ravi Ruia and Shashi Ruia.

An Essar spokesperson who declined to take questions said, “We are bound by confidentiality obligations under our agreement with Vodafone and therefore would not like to comment.”

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