On February 11, Vodafone bought a 67% controlling interest in Hutchison Essar from KS Li's company, Hutchison Telecommunications International. Vodafone acquired the stake at a firm value of $18.8 billion. Since then, speculation has been rife about what role the owners of the other 33% - the Ruia family of Essar group - would play in the company. Essar is a diversified Indian business group with interests in petrochemicals, steel and shipping. Yesterday, terms of the agreement between the partners were announced.
Hutchison Essar is to be renamed Vodafone Essar and will ultimately market its products and services under the Vodafone brand. Vodafone will have operational control of the telco. As it does currently, Essar will have representation on the board, proportionate to its ownership. Ravi Ruia will be appointed chairman of Vodafone Essar and Arun Sarin, Vodafone's CEO, will be vice chairman.
Essar will continue with its current 33% ownership. Between three and four years after VodafoneÆs acquisition is completed, Essar will have the right to sell its 33% shareholding to Vodafone for $5 billion or an option to sell between $1 billion and $5 billion worth of shares to Vodafone at an independently appraised fair market trading value.
At the agreed price of $5 billion, the equity value of Hutchison Essar is $15 billion. This is lower than the $16.5 billion equity value implied by the deal Vodafone struck with KS Li (the balance $2.3 billion is debt Vodafone is assuming). The $1.5 billion difference is the control premium Vodafone has paid for a 67% controlling interest.
VodafoneÆs Sarin says: "Essar has played a key role in transforming this business into a leading Indian mobile operator. We look forward to leveraging this experience and working with our partner as the company enters its next phase of growth in the attractive Indian telecommunications market."
Analysts say that Essar's decision to stay invested in Hutchison Essar suggests that they share the same bullishness as Vodafone on the Indian telecom industry. It also suggests that the Essar group does not have another investment lined up for which it wants to release capital.
Vodafone shareholders rewarded the resolution of an issue which had been threatening to thwart the deal by pushing shares up 1% in early trading.