New Delhi: London-based Vodafone Group Plc said it objected to its Indian partner Essar Group’s plan to value the stake held in India’s third largest mobile phone firm by subscribers, Vodafone Essar Ltd.
Essar Group has sought legal approval from the Madras high court to merge unlisted Essar Telecommunications Holdings Pvt. Ltd (ETHL), which owns an 11% stake in Vodafone Essar Pvt. Ltd, with listed India Securities Ltd (ISL). The merger proposal will come up for hearing on Thursday.
Essar’s remaining 22% is held through Essar Telecom Ltd, another unlisted firm.
The world’s largest telecom firm by revenue has primarily objected on the grounds that it does not want a company in which it holds a majority interest to become the subject of a “false” market. “Vodafone is concerned that the value of ISL could be misinterpreted as a fair market value of Vodafone Essar,” the company said in an emailed statement.
Vodafone is neither a shareholder nor a creditor of ISL or ETHL and has nothing to do with the merger scheme, the Essar Group spokesperson said in an emailed statement responding to Vodafone’s objection. “We have received their communication and are studying it and will respond appropriately,” he added.
Essar has the option of selling the 33% stake it holds for at least $5 billion (Rs.22,750 crore) and is also allowed to sell smaller stakes at an independently appraised fair market value.
The Ruia brothers, who control the Essar conglomerate, have till May this year to sell their stake to Vodafone. In July last year, Vodafone agreed to pay an additional Rs3,400 crore if Essar sells some of its shares.
Vodafone Group holds the majority of the remaining 52% stake that it bought from Hutchison Whampoa Ltd for $10.7 billion in 2007.
Based on the $5 billion guaranteed price for the stake, the value of asset being moved to ISL is worth around $1.67 billion.
According to the statement, Vodafone said it has written to both the Bombay Stock Exchange and market regulator Securities and Exchange Board of India expressing its concerns regarding the reverse listing of ETHL, and asked the regulator to investigate the matter.
The listing could give Essar an estimate of the value of the stake it holds and this could be used to put pressure on Vodafone to list the telecom joint venture while the latter does not want to do this, an analyst at a foreign brokerage firm said on condition of anonymity.
Vodafone has said that “there has been no disclosure to the shareholders of ISL on Vodafone Essar, which would become a substantial asset of ISL. Therefore, the investors in ISL have no basis on which to form a valuation judgement”.
The statement further adds that ETHL’s wholly owned subsidiary has stated in its information memorandum of September 2009 and January 2010 that it would use the proceeds of the bonds secured against Essar’s put options to invest internationally in sectors such as coal, steel and refining.
“ISL has not disclosed this and these investments are contrary to ISL’s stated investment intentions. Therefore, it is not clear what assets or liabilities ISL will have following the possible exercise of the underwritten put option or the fair market value option issued to Essar in 2007,” the statement said.
The third point made by Vodafone in the statement said that the valuation on which the conversion ratio for the new ISL shares was determined is based on the assumption that the underwritten put option will be exercised even though Essar has the right to exercise an alternative fair market value option at potentially a different valuation.
“Neither the existence nor the terms of this alternative option have been disclosed to the ISL shareholders,” Vodafone said.
Another point made by Vodafone in the statement is that ISL is a highly illiquid vehicle and post-merger more than 95% of the shares will be under the control of the Essar Group and two other shareholders. “Accordingly, small amounts of buying or selling could distort ISL’s share price,” the statement said.
Vodafone has also served its objections on Essar’s counsel in the Madras high court.
ISL rose 5% to Rs72.50 on the Bombay Stock Exchange on Tuesday even as the exchange’s Sensex index gained 1.11% to 19,092.05 points.
In 2008, the Essar Group had raised $3.6 billion from international banks against a part of its holding in Vodafone Essar, and bought steel companies in Canada and the US, besides expanding its telecom network in Africa.
It is currently enhancing its refinery capacity in Jamnagar to 33 million tonnes (mt) from 12 mt.
Unlike peers such as Tata Steel Ltd, which purchased Corus Plc for $12 billion, and Hindalco Industries Ltd, which bought Novelis Inc. for $6 billion, with borrowed money from overseas lenders, the Essar Group has been leveraging its stake in Vodafone Essar to support its expansion.