Vodafone Group Plc., the new majority owner of Hutchison Essar Ltd, India’s fourth-largest cellular services firm, has made an adjustment in the value of its Indian acquisition, setting aside $352 million (Rs1,443 crore) for 10 years “to meet certain specified liabilities” arising out of the $11.1 billion transaction.
Vodafone’s 67% buyout of Hutchison Essar from its Hong Kong parent Hutchison Telecommunications International Ltd in the biggest acquisition deal in Indian corporate history was caught in regulatory tailwinds with a nearly three-month delay in approvals.
The foreign investment promotion board or FIPB, the nodal body tasked with approving overseas ownership in certain industries, formally approved the transaction, announced on 11 February, earlier this week.
Late on Wednesday, it was not clear what exactly Vodafone had set the $352 million aside for. But, a telecom industry insider said, it “came out of certain conditions placed before the FIPB”. This person insisted that he not be identified, given the politically sensitive nature of the case.
FIPB cleared the deal after being given a commitment by HTIL, Vodafone and Asim Ghosh and Analjit Singh, controversial shareholders in Hutchison Essar, that the Indian duo did not represent the HK company as alleged by non-governmental organization Telecom Watchdog. Ghosh is chief executive of Hutchison Essar and Singh is chairman of New Delhi hospitals chain Max Healthcare.
The NGO had petitioned the Delhi high court that Ghosh and Singh were proxy shareholders for HTIL and that they were bound to sell their equity in Hutchison Essar to the HK parent at par with no potential for an upside that an independent shareholder would enjoy.
This arrangement violated Indian rules that capped foreign ownership in domestic telecom service companies at 74%, it said.
HTIL held 52% in Hutchison Essar, and its Mumbai partner Essar owned a third of the Indian phone firm with 22% being held through its foreign units. If the 15% stake held by Ghosh, Singh and financier IDFC Ltd were considered foreign, then the overseas holding in Hutchison Essar would rise to 89%.
HTIL, Vodafone, Ghosh and Singh, however, had deposed in documents presented to FIPB early in April that minority holdings of the two Indians were valued at $431 million by a ‘fair market value’ formula, which assumed a “future equity valuation” of $25 billion for Hutchison Essar, and argued they should not be seen as proxy shareholders.
At a market value of $18.8 billion, which was the value agreed for 100% of Hutchison Essar in the Vodafone-HTIL deal, the proportionate value of the Ghosh-Singh duo’s 12.26% holding is worth a little more than $324 million, about $28 million less than the $352 million Vodafone has set aside. It was not clear whether this $28 million provision was for the value imputed to the IDFC stake. Analysts were not concerned about the details of such provisions by Vodafone, though it could lead to more regulatory challenges. Telecom Watchdog has said it intends to challenge the FIPB approval in court.
“Investors were surprised by the number of regulatory hurdles that the company had to clear, but the market had seen this as a more or less done deal due to the strong track record of Vodafone in executing mergers and acquisitions,” said Cyrus Mewawala, telecom analyst with London’s Westhall Capital. Shares of Vodafone closed down 1.32% to 141.5 pence in a flat market at the London Stock Exchange.
Though HTIL and Vodafone refused to clarify the nature of the “specified liabilities”, the HK company told its shareholders the agreement on the $352 million Vodafone was retaining had set a tenor of 10 years for using the amount.
“If such specified liabilities are not incurred and the retention amount ($352 million) is not applied by the end of the retention period (10 years), Vodafone shall return... such unutilized part of the retention amount to the Company (HTIL) together with relevant interest ,” HTIL said in an HK regulatory filing. “Having regard to the terms surrounding the retention and release of any retention amount, the (HTIL) board considers it prudent to make a full provision against recovery of any part of the retention amount.”
Together with the $415 million that HTIL contracted to pay the Essar group for restraining it from challenging the sale to Vodafone, the $352 million retained by the Newbury, England company has lowered the HK firm’s pre-tax gain by 8% to $9 billion.
After retention of $352 million, Vodafone, that had to pay HTIL interest and other charges of $172 million for the period since the deal was announced in February, will shell out $10.9 billion against $11.08 billion projected earlier.