Vodafone Coughs Up $5B For Essar Stake In Telecom JV

This perhaps spells the end of reportedly a troubled cross-border corporate marriage. UK-headquartered Vodafone Group Plc has agreed to buy 33% stake in its Indian joint venture Vodafone Essar Ltd from the Ruias-led Essar Group for $5 billion.

Vodafone Group announced on Thursday, "Essar Group has exercised its underwritten put option over 22% of Vodafone Essar Limited (VEL). Following the exercise by the Essar Group of its put option, Vodafone has exercised its call option over the remaining 11% of VEL owned by the Essar Group resulting in a total cash payment of $5 billion. Final settlement is anticipated to be no later than November 2011. Vodafone Group's published net debt figure already includes this $5 billion."

Although the timing of the deal has come as a surprise, there are many loose ends in the transaction, which suggest that there could be more to follow in the transaction. For starters, Vodafone will own around 75% stake in the Indian telecom venture, just marginally above the 74% mark which is the maximum that a foreign investor can own in an Indian telecom firm as per existing foreign direct investment norms. The balance would continue to be held by some local partners that includes Analjit Singh of Max India.

Vodafone would need to dilute its direct ownership in the company or structure the final transaction in a way that its holding does not breach the Indian investment norms for the sector. This could be either through sale of shares to the existing Indian partners such as Singh (who has investments in his personal capacity) or through a sale of stake to a financial investor such as a private equity firm or a bank. The only other way to meet the local norms is a public issue.

VALUATION

The transaction values Vodafone Essar at $15 billion or Rs 66,700 crore. This is just about three times the market cap of Idea Cellular and just about half the market value of India's most valued and largest cellular operator Bharti Airtel. Vodafone Essar had a subscriber base of 130.9 million in India as of February 2011 compared to 86.8 million of Idea Cellular and 158.9 million for Bharti Airtel. Purely from this comparison, the deal appears to have be overvalued compared to Idea Cellular but cheaper compared to market leader Bharti Airtel. The key to the valuation could be profits that the companies are generating.

Bharti Airtel had net profit of around Rs 6,670 crore for the calendar year 2010 while Idea Cellular generated profit of Rs 890 crore approximately (calculated for last four quarters). By this statistic, Bharti Airtel's profit is 7.5 times more than Idea but its valuation is just over 6 times the AV Birla Group firm.

Early this year, it was reported that JP Morgan had valued Essar's 33% stake at just $2 billion. Vodafone had acquired 67% (direct and indirect) stake in Hutchison Essar for $11.1 billion four years ago in the biggest inbound acquisition deal ever. This deal valued the company at around $16.6 billion, which means Vodafone has lost value in the Indian arm during the past three years, as per its latest deal.