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The Essar Group has decided to exit from Vodafone Essar by shedding its stake in favour of joint venture partner Vodafone as part of a $5-billion deal.
The Vodafone Group would buy out the Ruias' 33 per cent holding in Vodafone Essar, thereby increasing its direct ownership in the country's third-largest operator to 75 per cent.
Now, the Vodafone Group will need to pare around 1.5 per cent stake to an Indian party to fall in line with foreign direct investment guidelines that do not allow foreign companies to own more than 74 per cent in a local mobile phone operator.
Essar's exit was facilitated after it implemented a put option over 22 per cent of the venture, according to a statement from Vodafone. Vodafone exercised its call option to buy an 11 per cent stake, it added.
According to the shareholders' agreement signed by Vodafone and Essar in 2007, Essar had the option of selling its 33 per cent stake in Vodafone Essar before May 8, 2011. Essar could either sell out entirely to Vodafone for a pre-determined amount of $5 billion or it could sell part of its shares to Vodafone in which case the valuation will be based on the fair market price.
In fact, the two parties differed over a reverse merger (proposed by the Essar Group) between Essar entities — Essar Telecom Holdings Ltd (ETHL) and India Securities — a process that could have helped in discovering the fair price of Essar's stake in the company.
“Given that the two parties did not go in for fair price discovery, it signals that the pre-agreed price ($5 bllion) may be actually higher than the current market price for the stake,” said Mr Kunal Bajaj, Director of research firm Analysys Mason.
Prior to this transaction, the Vodafone Group controlled 42 per cent of the Mumbai-based telecom operator through the FDI route and held another 25 per cent through partners Mr Asim Ghosh (ex CEO of Vodafone Essar) and Mr Analjit Singh (Chairman of Max Group).
Sources indicate that Mr Singh and Mr Ghosh could be offered additional stake so that Vodafone's holding in the company comes down to 74 per cent.
Though the deal involves an overall outgo of $5 billion from the Vodafone kitty, only $1.3 billion would be pumped into the Essar Group. The remainder will be used to prepay $3.6 billion that was raised by the group from international banks against a part of its holding in Vodafone Essar back in 2008.
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