Ending its long, sometimes testy, partnership with Vodafone, the Essar Group has decided to exit the Vodafone Essar joint venture (JV). The Essar Group has exercised its underwritten put option to exit completely from the JV, which offers nationwide mobile services.

A put option gives an investor the right to sell its stock at a specified price within a specified time, in this case before May 2011. Essar has used this option to sell 22 per cent of its 33 per cent stake to Vodafone. In turn, Vodafone exercised its call option on the remaining has 11 per cent stake. A call option is an agreement through which an investor can buy a stock at a specified price. The entire transaction is pegged at $5 billion.

Vodafone currently owns 42 per cent stake in Vodafone Essar directly, with a further 25 per cent held by the UK group’s Indian partners. Once the Essar-based deal is through, Vodafone’s shareholding will increase to 75 per cent.

However, Indian rules bar Vodafone from owning more than 74 per cent in a venture. Promising compliance, it has stated that it will abide by the regulations once the transaction with Essar is completed. Vodafone’s Indian partners may increase their shareholding in Vodafone Essar after the Essar transaction. Alternatively, Vodafone Essar could launch an initial public offering (IPO).

According to a Vodafone press release, the transaction with Essar should be completed in November 2011. It also added that the UK group’s net debt had already factored in the $5 billion payment. Vodafone’s net debt stood at £30.5 billion as on September 30, 2010.

End to past disputes 

The deal will bring to an end the increasingly strained relationship between the partners. Vodafone, based in Newbury, England, bought a 67 per cent stake in Hutchison Essar for $10.7 billion in 2007. As part of the deal, Vodafone had granted options to Essar that would enable the latter to sell its entire stake for $5 billion, or to dispose of part of the 33 per cent shareholding at an independently appraised fair market value.

In January 2011, Vodafone objected to Essar’s plans to place part (11 per cent) of its 33 per cent stake in India Securities Limited, a Bombay Stock Exchange-listed company of the group. Vodafone feared that the move would give an inflated market value to Vodafone Essar. This led to a war of words with Essar alleging that Vodafone was attempting to force it out of the JV and own 100 per cent stake in Vodafone Essar at an artificially depressed value.

Prior to this, in 2010, bankers valued the JV at between $13 billion and $18 billion when Essar considered an IPO for its stake in Vodafone Essar. That would have valued Essar’s stake in the JV at between $4.3 billion and $6 billion.

The two finally decided to appoint UBS as the third independent banker, which, along with Goldman Sachs and Standard Chartered Bank, was to work out a fair price for the deal.

Review 

With over 125 million subscribers as of February 2011, Vodafone Essar continues to be a top-league player in the country. The Indian operations contribute over 7 per cent to the total revenues and 30 per cent of the total mobile subscribers of the Vodafone Group. In this scenario, the move to increase its stake in the Indian subsidiary shows that the country remains a key focus market for Vodafone. 

The move is, moreover, in line with its ongoing restructuring exercise, intended at streamlining its equity holdings across the world. As part of this, Vodafone is enhancing its focus on emerging markets while exiting ventures where it is a minority shareholder. For instance, the company has already exited its minority holding in Japanese wireless operator Softbank Corporation for $5 billion as well as its 3.2 per cent stake in China Mobile for $6.6 billion. Currently, Vodafone is reviewing more minority holdings. It is mulling a sale of 25 per cent stake in Poland’s Polkomtel and a 45 per cent stake in Verizon Wireless, a JV between Verizon Communications and Vodafone. It has also recently exited from French mobile phone operator SFR, in which it held a 44 per cent stake.