Essar to transfer 11% Vodafone stake to arm

Essar to transfer 11% Vodafone stake to arm

Mumbai: The Ruias of the Essar Group will transfer their 11% stake in Vodafone Essar Ltd, the third largest mobile telephony operator by users, to listed group firm India Securities Ltd (ISL).

This is to facilitate price discovery of its holding in the telecom company as the put option of the group’s 33.02% stake in Vodafone Essar expires in May 2011, an Essar Group official said on Friday.

A 2007 contract gives the group the choice to offload its 33% share for $5 billion (Rs23,350 crore) within a year starting 8 May.

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. Vodafone Essar is a venture of British Vodafone Plc and the Ruias.

Vodafone in 2007 acquired about 67% owned by Hong Kong billionaire Li Ka-shing’s Hutchison Whampoa Ltd in what was then Hutchison Essar Ltd for $10 billion.

At the time, the Ruias, who owned the remaining 33.02% 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.

The Ruias own the stake through two firms—11% held by Essar Telecommunications Holdings Pvt. Ltd (ETHPL) and the remaining 22.02% through Mauritius-based Essar Telecom India Ltd, another private company owned by promoters.

ETHPL will be merged with ISL and this will allow ISL’s shareholders to particpate in Vodafone Essar through their shareholding in ISL, the official said. He did not want to be identified.

The Ruias own 74.22% in ISL.

ISL shares closed higher by 4.94% to Rs28.70 on the Bombay Stock Exchange (BSE) on Friday. The firm’s market capitalization is Rs572.85 crore.

The current government guidelines allow foreign entities to own only up to 74% in a telecom firm. The 11% stake would be valued at a minimum $1.2 billion, the official said.

The group has already monetized some part of the put option by offering part of its stake in Essar Telecom as collateral to bondholders to raise $900 million. The official was non-commital on the group’s plans on the put option.

In a related restructuring exercise, ISL will sell its leasing and financial services business to another group firm Essar Securities Ltd (ESL), which will carry out all its financial services business, the official said.

ISL will soon appoint investment bankers to ascertain the value of its leasing business.

ESL shares rose 2.29% on BSE to close at 62.55 on Friday.

The promoters own 74.57% stake in ESL.

The Essar Group has been building on its telecom assets and has made a few strategic acquisitions abroad.

In November, it acquired a majority stake in Abu Dhabi Group Warid Telecom Pvt. Ltd’s operations 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.

Lison Joseph contributed to this story.