Vodafone Group PLC said Thursday it has paid $5 billion to buy out its joint venture partner in India, in a move aimed at strengthening the mobile giant's position in the region which has proved tumultuous since it set up shop in 2007.
The deal won't come as a major surprise to investors as Vodafone had a pact with the Essar Group, allowing the Indian firm to sell its 33% stake to Vodafone for $5 billion before a May 8 deadline.
The alternative was that the Essar Group could sell shares in the venture worth between $1 billion and $5 billion to Vodafone at a market-determined price, to be evaluated by two investment bankers, with one each appointed by the two parties.
As a result of the transaction, Vodafone effectively owns a 75% stake in the Indian business. The remainder is owned by entities that are majority owned and controlled by Vodafone's Indian partners, in which Vodafone also has minority interests.
An Essar Group spokesman declined to comment on the deal, noting it is "bound by confidentiality obligations under our agreements with Vodafone."
Vodafone has had a rough time in India, booking a GBP2.3 billion impairment charge on its operations there last year due to stiff competition and a fierce price war. The world's biggest mobile operator by revenue is also fighting the Indian government over a tax demand relating to Vodafone's $11.2 billion acquisition of Hutchison Essar Ltd. in 2007.
Since Vodafone entered the Indian market in 2007, the government has issued six additional national mobile licenses, which triggered intense price competition.
Vodafone and the Essar Group have been locked in a recent spat over how the Indian conglomerate would exit the joint venture. Essar wanted to merge Essar Telecommunications Holdings Pvt. Ltd.--which held the Indian group's 11% stake in Vodafone Essar-- into a publicly listed but little-known group company called India Securities Ltd.
Essar hoped the merger would help put a value on its stake in the joint venture with Vodafone. But Vodafone objected to the move, saying it was concerned that the value of India Securities after the merger could be misinterpreted as a fair market value of unlisted Vodafone-Essar. The dispute has gone before the courts and the court case is due to resume Friday.
Essar's remaining 22% stake in Vodafone Essar was owned by the privately held Mauritius-based Essar Telecom India Ltd.
Despite all the woes in India, Vodafone is starting to make inroads with its Indian business reporting a 15% rise in service revenue for the six months ended Sept. 30 2010 from a year earlier after adding 14.7 million customers during the period. It has over 127 million customers in India.
In a brief statement, Vodafone said that the Essar Group has exercised its underwritten put option over 22% of Vodafone Essar Ltd.
Vodafone has exercised its call option over the remaining 11% of Vodafone Essar owned by the Essar Group, meaning it can buy the stake at an agreed price.
Sanford Bernstein said the move "will not materially affect any company financials" as the $5 billion price tag is already fully included within Vodafone's net debt, which stood at GBP30.3 billion at the end of Dec. 31 2010. The broker retains an outperform rating on Vodafone with a 240 pence price target.
The deal gives Vodafone Essar an enterprise value of about $15 billion, which is far below the $19 billion valuation put on the venture when Vodafone bought its stake, according to an Indian analyst.
Even so, the $5 billion price over values the venture considering the decline in profitability and steep competition, but it is understandable considering it gives Vodafone total control in a key market like India, he added.
The final settlement is anticipated to be no later than November 2011.
