Mumbai: Vodafone Plc and the Essar Group have renegotiated an agreement that gives the Indian group the option to sell either the entire 33% stake or a part of it in Vodafone Essar Ltd, India’s second largest telecom firm in revenues.
The global telecom firm will pay Essar an additional Rs3,400 crore if it decides to exit the joint venture, but only if the outgo does not exceed $5 billion, thus capping Vodafone’s exposure.
The put option held by Essar expires on 8 May 2011.
Vodafone disclosed the new deal when it announced financial results in London for the quarter ended 30 June, during which its Indian operations had an operating cash profit for the first time. Vodafone attributed the new approach to “the upfront cost (Rs11,617 crore) of 3G licences.” Valuations in India have been under pressure ever since the entry of new players and aggressive bidding for 3G spectrum put a question mark on the profitability of telecom firms.
Spokespersons for Essar Group and Vodafone Essar declined to comment.
“If you look at the current market valuation of telecom stocks, this appears to be a win-win situation for Essar because they are guaranteed $5 billion irrespective of market valuation,” said an analyst with a Mumbai-based brokerage. “If and when the sector gets better valuations, Essar has the option of selling the residual (shares over an above what is valued at$5 billion) in the open market.”
The analyst did not want to be identified as his firm did not have much information on the new payout cap.
Vodafone, on 31 March, had written off Rs15,157 crore in the value of its Indian operations, citing “sharp drop in call rates and intense competition.” Vodafone entered India in 2007 by acquiring 67% of Hutchison Essar for $10 billion.
“Service revenue grew by 13.7%, including a 1.5 percentage point benefit from Indus Towers, representing an improvement on the previous quarter,” a Vodafone statement on Friday noted. “Growth was driven by an increase in the customer base, with net additions for the quarter of 8.2 million, and increased usage per customer partially offset by ongoing competitive pressure on mobile voice pricing.”
Like Idea Cellular Ltd, which announced its results on Thursday, Vodafone also reported an increase in minutes of usage by customers. “The strong volume (minutes of usage) growth reported by both Idea Cellular and Vodafone points to the trend of incumbent operators re-capturing the competitive advantage from new operators,” said Piyush Choudhary, telecom sector analyst with Mumbai-based brokerage Indiabulls Securities Ltd. Slower growth in European markets means Vodafone has to depend on emerging markets such as India to drive its overall growth.
“The challenge for Vodafone is in Europe,” said Emeka Obiodu, senior analyst at London-based technology and telecom consultancy Ovum. “Vodafone’s key strategic agenda should be to nurture their European business back to growth before growth in their Indian operation inevitably stalls.”