After a well-publicised deterioration in relations, Vodafone has announced that it will acquire Essar’s 33% stake in the two firms’ Indian mobile joint venture for US$5 billion. The UK-based firm is able to buy out its partner via put and call options which formed part of the initial agreement between the two companies.
These options, which were agreed to four years ago at the joint venture’s inception, allow Essar the option of either selling the whole stake at a prearranged price of US$5 billion, or selling a percentage of it at a market rate determined as fair by an independent assessor.
As the expiration date for these options drew closer however, there was a breakdown in relations, with Vodafone claiming in January that Essar was attempting to boost the stake’s value by investing a percentage of it in the small public firm India Securities.
Evidently however the initial call and put options have been abided by, with Vodafone’s US$5 billion offer matching up to the previously agreed price for the entire stake. The UK firm has set a November deadline for closing the deal, which also covers the Indian conglomerate’s net debt.
Vodafone entered the Indian market in 2007 with the acquisition of a 67% controlling stake in Hutchison Essar (subsequently rebranded as Vodafone Essar) for US$10.9 billion. However, the firm has since met with several setbacks, among them a US$2.5 billion tax charge on the original deal with Hutchison. While it has contested this, Vodafone’s financial statements showed that its Indian assets last year dropped in value by £2.3 billion.
Indian regulatory requirements prohibit Vodafone from holding over 74% of Vodafone Essar’s assets; the firm itself currently holds 42%, while the holdings of its Indian associates make up another 25%. Vodafone has stated that it will conform to this regulation following the transaction; this will either require the firm to make an IPO on some of Vodafone Essar’s shares, or for its Indian partners to acquire more shares.