Vodafone questions motivation behind Essar’s proposed “backdoor” merger

As part of an ongoing spat with its Indian partner Essar, Vodafone has released a statement declaring its stance on the matter.

Vodafone has been accused by Essar of attempting to devalue Vodafone Essar, an Indian mobile joint venture between the two firms, and has refuted Essar’s claims that it moved to prevent an initial public offering for a percentage of Essar’s stake in the venture.

Essar’s 33% stake in Vodafone Essar is split between two bodies – Essar Telecommunications Holdings (ETHPL), which holds 11%, and an unlisted firm which holds the remainder. The dispute has arisen due to Essar’s planned merger of ETHPL with India Securities (ISL), a listed company.

Vodafone has stated that it has written to both the Bombay Stock Exchange and the Securities and Exchange Board of India to express its concerns regarding the reverse listing of ETHPL into ISL, and has asked for the matter to be examined.

The operator’s key concern is that the proposed merger is merely a cynical means of establishing the market value of their joint venture, having gone on record claiming that “Essar appears to admit in its statement that the only purpose of the merger is the discovery of the fair market value of Vodafone Essar.”

However, in spite of its written complaint, Vodafone has confirmed that it will not move to prevent the IPO since “material information has not been provided to the market.”

It has been reported that Vodafone is attempting not to disclose the value of Vodafone Essar as investment would significantly increase the amount that it would be forced to pay if it attempted to buy out Essar. A merger between ETHPL and ISL would, claims Vodafone, represent a “backdoor entry” for potential investors in Vodafone Essar.

At present, the conditions of the joint venture give Essar a deadline of May 8th to come to a decision over whether it will sell either a part or all of its stake to Vodafone. While Essar could sell the entire stake for US$5 billion, the price for a percentage of it would need to be calculated at the current market rates; this has led many observers to believe that Essar is establishing which course of action would provide the best value for money.

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