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Vodafone gives Essar enough space

Post deal the Indian group continues to hold 33 pc, but ensures itself a $5-billion valuation, reports Arun Kumar.

business Updated: Mar 15, 2007 21:37 IST
Arun Kumar

The Ruias have shown that they can eat the cake and have it too. Their Essar group unveiled on Thursday the details of their deal with Vodafone after the European giant's acquisition of mobile phone service firm Hutchison Essar Ltd, under which the Indian group continues to hold 33 per cent, but ensures itself a $5-billion valuation and gets the chairmanship of the hot joint venture.

While Hutchison Essar will become Vodafone Essar after Vodafone's acquisition of a majority interest amid a controversy over regulatory issues related to foreign direct investment (FDI), Indian-born Arun Sarin, Vodafone's CEO, has given considerable ground to the Ruias, who have managed to limit their downside risk.

Sarin, banking on network expansion, product improvement and innovations, told reporters he expected the JV to become India's top mobile service firm by 2010 with a 20 to 25 per cent market share, up from the current 16 to 17 per cent.

The brand, starting out as Vodafone Hutch, will eventually drop the Hutch part.
"Essar has played a key role in transforming this business into a leading Indian mobile operator. We look forward to leveraging this experience," Sarin said.

The deal involves a put option under which within four years, Essar can sell its stake to Vodafone for $5 billion. The group is now capable of using the option as collateral to raise an equal amount (about Rs 22,000 crore) by way of debt from Indian or foreign banks. That could help fund the group's plan to expand in areas like power, infrastructure and retail.

"As it appears Vodafone's acquisition is in conformity with the law and FIPB will consider the case when it comes to it," Commerce Minister Kamal Nath said after he met Arun Sarin and Ravi Ruia, who has been named by Vodafone as chairman of the joint venture. Sarin, proposed by Essar, will be vice-chairman.

The Foreign Investment Promotion Board (FIPB) is likely to approve Vodafone's stakes on March 20, when it is expected to meet next.

Vodafone, which acquired control from HongKong's Hutchison Telecom, will retain Asim Ghosh as chief executive, while Essar will enjoy rights proportionate to its shareholding.

Ghosh and Indian partners Analjit Singh and IDFC hold 15 per cent in the joint venture, but through a complex arrangement involving funding from Hutchison that deprives them of normal shareholder rights. Under the current Indian regulations, foreign partners cannot hold more than 74 per cent. Two-thirds of Essar's 33 per cent is held abroad. If Vodafone buys out Essar and also the other Indians, it would be violating FDI norms.

"We remain compliant in this structure and we will remain fully compliant," Sarin said.