Mumbai: Essar Group will bide its time in exercising the so-called put option that will kick in on 8 May, giving the Indian conglomerate the right to sell its 33% stake in Vodafone Essar Ltd to UK-based partner Vodafone Group Plc for $5 billion (Rs22,200 crore), two people close to the Indian group said.
Vodafone in 2007 acquired the 67% stake owned by Hong Kong billionaire Li Ka Shing’s Hutchison Whampoa Ltd in what was then known as Hutchison Essar Ltd for $10 billion.
At the time, the Ruias of Essar Group, who owned the remaining 33% of India’s second largest mobile phone company by revenue, wrested a concession from Vodafone to guarantee a floor price of $5 billion for their stake. The put option is exercisable from 8 May 2010 to 8 May 2011.
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.
“Essar is happy with its investment in Vodafone Essar and the company continues to do well in an otherwise turbulent telecom environment,” an Essar group spokesperson said in an email.
“A decision on exercise of the put, if at all it is exercised, will only be taken at the appropriate time.”
An investment banker closely associated with Essar, who declined to be identified, said any decision to exit Vodafone Essar will have more to do with the group’s strategic interest in the telecom sector and not merely in encashing the put option. The Essar Group has been building on its telecom assets and has made a few strategic acquisitions abroad.
In November, Essar acquired a majority stake in Dhabi Group’s Warid Telecom (Pvt.) Ltd operation in Uganda and the Republic of Congo, ramping up its presence in Africa. The group also has a 49% stake in Zimbabwean telecom firm Econet Wireless (Pvt.) Ltd, with which it also has a joint venture in Kenya called Yu, a cellular services firm.
It has a 10% stake in Loop Telecom Ltd, a significant company in the Mumbai telecom operating area which also has licences for pan-Indian operation.
Essar’s relationship with Vodafone has had its ups and downs. The two partners are at the opposite ends in an arbitration case over the sale of Loop to Vodafone Essar.
Essar Group, which has interests in steel, shipping and power, last week raised $1.97 billion through an initial public offering of shares in its unit Essar Energy Plc.
The group has also raised loans by pledging at attractive interest rates with lenders its 33% stake in the telecom unit on the basis of the $5 billion floor price guaranteed by Vodafone Group. Essar has raised $4.52 billion against the stake in two loan tranches of $3.6 billion and $0.92 billion, respectively.
Delaying the stake sale until an eventual initial public offering of shares in Vodafone Essar would enable the group to get market rates benchmarked against telecom peers listed on Indian stock exchanges. Indian telecom stocks have been underperforming the benchmark index since December 2008, and it may not be the best time for Essar to sell the asset given the sector’s current valuations, said the investment banker cited above.
Vodafone Group’s half yearly report refers to the option agreement with Essar.
“The (Vodafone Group) is party to a number of option agreements which could result in it being required to pay cash to maintain or increase its equity interests in its operations in India and the US,” it says.
“In relation to India, the group granted put options exercisable between 8 May 2010 and 8 May 2011 to members of the Essar Group of companies that, if exercised, would allow the Essar Group to sell its 33% shareholding in Vodafone Essar to the group for $5 billion or to sell between $1 billion and $5 billion worth of Vodafone Essar shares to the group at an independently appraised fair market value,” said the report for the six months ended 30 September.
Market analysts are negative on the telecom sector in the short term because of intense price competition and expected high payout in the auction of 3G spectrum that’s now under way. The price of one slot of 5Mhz of 3G spectrum has reached Rs9,521 crore, or 172% more than the base price of Rs3,500 crore, in the auction.
“Underperformance of telecom stocks to the Nifty after December 2008 correlates with concerns over 3G and the tariff war,” says Abhay Moghe, telecom sector analyst in the equities research arm of investment banking and securities broking firm Avendus Capital Pvt. Ltd, in a 21 April report on the sector. “Yet, stocks may not rebound soon as net profits for FY11 face potential downside arising from the persistence of low tariffs and the possible rise in financing costs.”
Moghe’s report notes that FY12 may bring more positives for the sector with “the likely return of price discipline and payback in some projects where investments were made till FY10”.
India has telecom circles with up to 14 operators, which is unsustainable in the long run, according to Kamlesh Bhatia, principal research analyst at market research and advisory firm Gartner Inc., who expects a shakeout within the next two years that will leave a maximum of four or five service providers per circle.