Channel: Companies

Tuesday, April 26 2010
Vodafone to acquire Essar stake for $5 bn

Indian telecom sector seems to be experiencing a constant wave of change.The 2nd largest telecom market in the world witnessed themuch awaited 3G auction and controversy covering the 2G spectrum scam involving high profile political giants. Though the same had the potential to dent the image of Indian telecom growth story but the recent buyout proposal by Vodafone to acquire Essar is very much the vindication of the fact that the Midas touch of the sector continues.


Vodafone world’s largest mobile operator by subscribers is all set to acquire 33% stake in Essar Group from their Indian joint venture for $5 billion, the deal will provide Vodafone direct ownership of 75% in Indian operation.The merger approved by the boards of both the firms, was awaiting the final approval of the Madras High court.


In 2007, when both the companies came together the stake sale was the part of agreement reached between the two companiesbut during thedeal there was some dispute regarding the clauses.


When everything was settled Vodafone has agreed to pay Essar any other appreciation in value of the 33% stake after a valuation exercise by independent bankers.


The company headquartered in Newbury, England will now purchase a 22.03% stake from Essar Mauritius and the remaining 10.97% from the Indian company EssarTeleholdings by the end of the year.


This acquisition will raise company’s direct stake above the 74% limit for foreign direct investment in domestic telecom companies.Vodafone officials saidthat it would hold a little more than 75% in Vodafone Essar Limited (VEL) because of which it would need to sell a holding of about 1.3-1.4%. Adding to it they also hinted that the company may come up with an initial public offering (IPO) or sale to Indian investors. They have also decided to comply with all the rules on foreign direct investment limits before the completion of the deal.


Vodafone currently holds about 42% direct equity interest in VEL, while the Essar Group holds 33%. The remaining 24.6% is held by entities majority owned and controlled by other Indian partners (in which Vodafone has minority interests).


The deal will give Vodafone complete control of Indian operations and on the other hand Essar Group will lose its board representation.


After the failure of $38 billion bid in 2004 for US mobile operator AT & T wireless, two years later the chief executive of Vodafone ArunSarin was looking for the telecom growth market on the globe. In February 2007, Vodafone entered Indian market with a strategy to tap growing domestic market and they were pretty successful in doing so. In the fiscal year ended 31 March 2010, India was its seventh largest revenue earner, providing 7% of total revenue, up from 6.56% in the fiscal ended March 2009 and 5.14% in 2008.


In 2010, VEL invited investment banks to find buyers for the 33% stake through IPO’s but market conditions then were volatile and with the unattractive valuations, the idea was dropped.


Telecom stocks in last two years have not performed too well, the valuations has been too lower than they were expected. But for Essar this deal will put a lot of cash in their hand which they can further use to repay debts and fund growth of their other business on the globe.


In early 2000’s Ruias sold their stake of 67% in business to Hutchison Whampoa Ltd for around $400 million. The money after sale was used as capital in steel and oil; further Vodafone paid $11.1 billion for Hutchison’s 67% stake in the Indian company. That purchase, which valued Essar’s 33% stake at nearly $6 billion turned out to be a money spinner for the Indian group.


The partnership that started in 2007 didn’t work well for both the companies and this deal is bringing an end to their increasingly fractious relationship. The bitterness in relationship was not only known to both the companies but in recent times it became public too.


It is expected that Vodafone’s final settlement would be completed by November, 2011.But, during this timeVodafone has faced many challenges, from high spectrum costs, an ongoing dispute over tax and an increasingly difficult relationship with its main partner, which doesn’t put forward a good image for foreign players in Asia's third-largest economy.


The Vodafone attempt to buy the Essar share increasingly speaks of the significancethe British player attaches to the Indian market. The fact is that Vodafone itself has expressed its displeasure over procedural and tax ambiguity in Indian policies and is still waiting for the final judgement in Vodafone-Hutch deal tax case.The move by Vodafone is once again a vindication that despite governance issues,India provides a fabulous business opportunity and so no one can ignore thepotential of rising India.


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