Mumbai: Vodafone Group Plc, the world’s largest mobile telephony company by subscribers, said on Thursday it will purchase Indian partner Essar Group’s 33% stake in Vodafone Essar Ltd (VEL), India’s third largest mobile telephony company by subscribers, for $5 billion (Rs22,350 crore) in cash.
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The partners were locked in a bitter battle over the Ruia-led Essar’s proposed merger of Essar Teleholdings Ltd, through which it owned 10.97% stake in VEL, with another listed group company, India Securities Ltd.
The merger, approved by the board of two Essar firms, was awaiting the final approval of the Madras high court.
Vodafone objected to the merger on the ground that it does not want a company in which it holds a majority interest to become the subject of a “false” market. It was concerned that the value of India Securities, which is engaged in the business of financing, investing and providing consultancy services, could be misinterpreted as a “fair” market value of Vodafone Essar.
The stake sale is part of an agreement reached between the two in early 2007 when they initially came together. This obliged Vodafone to pay at least $5 billion to purchase its partner’s stake in the company.
Vodafone had also agreed to pay Essar any additional appreciation in value of the 33% stake after a valuation exercise by independent bankers.
The Newbury, England-headquartered mobile company will now purchase a 22.03% stake from Essar Mauritius and the remaining 10.97% from Indian company Essar Teleholdings by November.
This, in turn, will raise its direct stake above the 74% limit for foreign direct investment in domestic telecom companies.
Vodafone Plc spokesman Ben Padovan said over the phone from London that it would hold a little over 75% in VEL because of which it would need to sell a holding of about 1.3-1.4%.
“It may happen through an initial public offering or a sale to an Indian investor. There are plenty of options and we haven’t decided yet, but we will comply with all rules on foreign direct investment limits before the completion of this deal by November 2011,” Padovan said.
According to Padovan, Vodafone currently holds about 42% direct equity interest in VEL, while the Essar Group holds 33%. The remaining 24.6% is held by entities majority owned and controlled by other Indian partners (in which Vodafone has minority interests).
These current partners are Analjit Singh, founder and chairman of the Max India group, and Infrastructure Development Finance Co. Ltd. Padovan didn’t say how much these partners held individually.
Vodafone had earlier parked a 17% stake with Singh and the former chief executive officer of VEL, Asim Ghosh.
A spokesman for Singh said that he wasn’t available for comment.
Rabin Ghosh, Essar spokesman, said the company cannot comment on the development as it is bound by a confidentiality agreement.
The transaction will give Vodafone complete control of its Indian operations as Essar will give up its board representation.
India has been an important part of Vodafone’s strategy to tap growth in emerging markets since its entry into the country in February 2007. In the fiscal year ended 31 March 2010, India was its seventh largest revenue earner, providing 7% of total revenue, up from 6.56% in the fiscal ended March 2009 and 5.14% in the year before.
Earlier in 2010, VEL invited investment banks to find buyers for the 33% stake, which included an initial public offering option. With volatile market conditions and unattractive valuations, the exercise was called off.
“At $5 billion, the deal values Vodafone Essar at less than 15 times Ebitda, or earnings before interest, tax, depreciation and amortization,” said an investment banker. “From the promoters’ decision to exercise the put option at a predetermined $5 billion, it is evident that the valuations that the (currently) appointed bankers determined was far lower.”
“In the last two years, telecom stocks have got hammered so badly that the valuations have been far lower than what Ruias expected. This deal puts a lot of cash in the hands of Essar, which will use part of it to repay debts and fund growth of their energy business overseas,” the banker added.
India Securities closed 1.8% lower at Rs63.70 while Essar Oil Ltd fell 1.8% to Rs124.50 on the Bombay Stock Exchange on Thursday. Another group company, Essar Shipping Ports and Logistics Ltd, rose 2.2% to Rs94.25, outperforming the 0.8% rise of the exchange’s benchmark equity index, the Sensex.
The Ruias built their mobile telephony business by purchasing Sterling Telecom Ltd. (which had a licence to operate in the Delhi circle) from C. Sivasankaran by selling ancestral property in Chennai and their shares in Tamilnad Mercantile Bank Ltd.
In the early 2000s, the Ruias sold a 67% stake in the business to Hutchison Whampoa Ltd for around $400 million. “We used the money as capital in steel and oil,” said a senior executive of the group. He cannot be quoted as he is not authorized to speak to the media.
In 2006, Vodafone chief executive Arun Sarin, was scouting for a telecom growth market like India to boost long-term revenue. He was under pressure from shareholders to expand after a failed $38 billion bid in 2004 for US mobile operator AT&T Wireless.
Vodafone paid $11.1 billion for Hutchison’s 67% stake in the Indian company. That purchase, which valued Essar’s 33% stake at nearly $6 billion, turned out to be a money spinner for the Indian group, thanks to riders built into the agreement between it and Vodafone.
“Ravi Ruia took a tough stand to include a put option with a benchmarked value of $5 billion. He could have even gone to court, armed with a right of first refusal clause in the earlier agreement with Hutchison,” said the senior official quoted earlier in the story.
Vodafone relented even though the company argued that it had never signed such clauses with other global partners.
In 2007, as the Ruias hosted a party for Sarin at their sea-facing bungalow in Mumbai, the new joint venture agreement with Vodafone laid the foundation for the Essar Group’s global footprint.
Essar hired a bunch of investment bankers seasoned in sectors such as steel, coal, refinery, oil and gas. Group vice-chairman Ruia shifted base to London and launched a new brand identity.
“Our stake in VEL changed our perception with the investor community,” said the Essar official.
Back home, Essar Oil came out of corporate debt restructuring, while Essar Steel Ltd was delisted. The group also began building its refinery at Jamnagar, Gujarat, which was earlier on hold from 1995 for lack of capital.
While bankers identified specific targets, the group finance heads raised around $4.5 billion from lenders using the 33% stake as a collateral.
Lenders, who were not forthcoming with money in the late 1990s, were enthusiastic backers now because of the put option.
The Essar Group’s ambition to build an integrated steel business in North America started with the purchase of Algoma Steel and later Minnesota Steel, with a secured supply of iron ore and coal to feed their plants.
Next on the radar were Europe and Africa. It purchased the Warid Group’s controlling stake in the mobile telephony business in Africa, a 50% stake in the government-owned Kenya Refinery, and oil blocks in Nigeria and Madagascar.
In Asia, it purchased oil and coal blocks in Indonesia, Vietnam and Australia.
Last year, Essar Energy Holdings Pvt. Ltd raised $2.1 billion by selling shares on the London Stock Exchange.
Once in the late 1990s, the Ruia brothers were looking to consolidate their telecom business after entering the Delhi circle.
They were scheduled to meet officials of Punjab-based mobile telephony company HFCL Ltd, which they’d just bought, but their helicopter developed a technical snag. The elder Ruia, Shashi, who had spearheaded the entry into the telecom business, stayed back in Delhi. He was not comfortable with the idea of investing more cash in the business.
In retrospect, the decision of the younger Ruia, Ravi, to take a road trip to Punjab to push the telecom venture forward, has paid rich dividends.
Graphic by Ahmed Raza Khan/Mint
firstname.lastname@example.org Sneha Shah contributed to this story.