Vodafone mulls new pact with Essar


Staff member
Mumbai January 31:

Global telecom giant Vodafone may push for a new agreement, including crucial changes in shareholder rights with its Indian partner Essar, if the latter decides to only part sell its stake in the joint venture Vodafone Essar.

Essar has a "put option" to sell its entire 33% stake for $5 billion, or to sell a part of it at a discovered price, to Vodafone which can be exercised by May. The current agreement gives the Ruias of Essar the same boardroom rights, including a veto power, as long as they hold a minimum 10% stake in the JV, Vodafone Essar.

Sources said Vodafone wants a new agreement in which Essar's rights could be diluted, irrespective of how much stake the latter continues to hold. Vodafone's Italian CEO Vittorio Colao wants more flexibility in dealing with the local partner given their troubled history. This could be a crucial bargaining chip, or counter pressure, as both the shareholders are in the midst of an ugly spat over potential valuation of Essar's 33% shareholding in the JV. Under the current scenario, Essar with four board members has veto powers on any Vodafone plan involving expenditure over $50 million and right of first refusal over its partner's stake, which is mutual.

While Vodafone would prefer to buy the entire Essar stake later this year, its local partner is most likely to opt for a part sale keeping its shareholding well above the requisite level to keep its rights. A put option gives the seller rights to offer shares at a specified price but does not place any obligation on the party to sell within a specific time.

A source in the Essar group, without wanting to be named, said it was very clear that the 10% stake will be retained to keep the rights intact. When contacted, a Vodafone spokesperson in London said that the company does not divulge shareholder rights and therefore, declined to comment. Essar is expected to oppose any move to renegotiate the existing agreement unless both players agree to an amicable settlement. Sources said Vodafone believes the terms of its four year-old JV must be renegotiated-if Essar wants to extend the association-as the Indian partner holds significant boardroom leverage right now.

It does not want to be frustrated by the local partner who would wield the same powers even after unlocking significant value in a part stake sale. This could be another flash point depending on how the current situation unfolds. Essar's relationship has not been the same with Vodafone after its former CEO, India-born Arun Sarin, left the company over two years ago. It was under Sarin that Vodafone acquired 67% stake in Hutchison Whampoa, where Ruias hold the remaining 33%, for $11 billion in 2007.

The latest row between the partners erupted when Essar embarked on the reverse merger of Essar Telecom Holdings (ETHL) into its listed group firm, India Securities. Essar started the process as a price discovery move with the put option date approaching. ETHL holds a part (11%) of the Essar stake in the JV. Vodafone said it was concerned that such a move could distort the valuation of the JV and that the value of India Securities could be misinterpreted as a fair market value of Vodafone Essar.

Vodafone has filed an appeal against Essar's move in the Madras High Court where the latter has initiated the merger proposal of the two group firms. Essar reacted stating Vodafone had no locus standi to oppose the move as it was neither a shareholder nor a creditor in these companies.

Analysts have dubbed Essar's move as an exercise aimed at maximizing the potential value of its stake in Vodafone at a time when telecom valuations are under pressure due to regulatory hangover, controversies related to spectrum allocations, falling call rates and higher than expected 3G cost. Essar would think the value of its stake is higher than $5 billion, while Vodafone believes sectoral valuations have declined in recent years.