Vodafone steps carefully around Essar

Vodafone soft-pedals on some of its post acquisition announcements as discussions begin with the Essar group, and the Ruia family, regarding its 33% stake in Hutchison Essar.
Vodafone may have been premature in announcing network and other infrastructure sharing with Bharti as part of its acquisition of Hutchison Essar. The Ruia family, which controls the Essar group, say they weren't consulted before this critical business decision was finalised. But the larger problem looming for Vodafone relates to EssarÆs 33% stake in the telco, and what the Ruias family plans to do with this stake.

The Ruia family were the Indian partners of Li Ka-Shing's Hutchison Telecommunications in the Hutchison Essar joint venture. At various critical junctures over the last few months, the family was said to have been dissatisfied with the way the sale of the business was being conducted. The Ruias claimed a first right of refusal on the 67% stake up for sale.

When on February 12, Vodafone announced its acquisition of Hutchison's 67%stake in the Indian telco, valuing the business at $18.8 billion, observers assumed the problems with Essar had been ironed out. In response to questions, Vodafone CEO Arun Sarin categorically stated that the Ruias had not had a first right of refusal on the stake. He was probably hopeful that he had laid this ghost to rest for once and for all. As part of the deal, Vodafone also announced it had finalised plans with Bharti for network sharing and cooperation on other areas.

The Ruias were guarded in their initial reaction to Sarin's comments, only saying they were evaluating their options. Sources commented that there were three obvious choices for Essar: to sell its entire 33% stake to Vodafone at the top dollar being offer; to sell part of its holding; or to retain its stake.

Vodafone made statements that it hoped Essar would remain as a joint venture partner because of the value that the Ruias had created. However, observers have speculated that Vodafone is paying lip service to the Ruias and might actually be relieved if they were to exit û even if that meant arranging another domestic partner to ensure the company complied with foreign ownership rules.

But, as has happened before in the history of Hutchison Essar, the Ruias have proven that they are not to be under-estimated.

On February 16, Essar issued a statement that it ôsees telecom as a core part of its business portfolio for the long term and has no intent to exit the companyö.

The Ruias then fired their next salvo, claiming that as significant shareholders they should have been consulted when the arrangement with Bharti was finalised. Sources close to the deal say that such decisions are the prerogative of Hutchison Essar and not within the domain of an incumbent shareholder to announce as part of a change in control. This issue seems to have been resolved with Sarin back-tracking by saying he had only agreed suggested terms with Bharti and that a final agreement was yet to be inked.

Vodafone has assured shareholders it will not take on litigation with this acquisition. Hence its interest in ensuring an amicable resolution of matters with Essar.

Sources close to the deal say Essar is interested in hiking its stake in the telco and in exercising more control. Currently, Essar has four directors on the board out of a total of 12, proportionate to its 33% shareholding. Analysts comment that Essar had no reason to sell to Vodafone at this stage as a selldown through an IPO in India's booming stock markets could fetch them similar proceeds. Indeed, Aditya Birla group company Idea Cellular opened its aggressively priced IPO earlier this week.

Vikash Saraf, CEO of Essar Teleholdings, says: ôWe are currently in early stages of discussions with Vodafone. Talks to date have been constructive but, as is to be expected in such a situation, no conclusions have yet emerged.ö

Meanwhile, in Hong Kong, Hutchison Telecom has scheduled an analyst call on February 22 to discuss what it plans to do with the proceeds from the sale. Shareholders are set to vote on the sale in March.

One can probably expect a few more surprises - whether from London, Mumbai or Hong Kong - before this deal, one of the largest inbound M&A transactions in India to date, is signed, sealed and delivered.
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