Vodafone's $5-billion deal to buy out Essar in India's third-largest mobile phone company may run into trouble with the local partner seeking $600-700 million more for its 33% holding.Essar group, known for its strong-arm negotiation tactics, will invoke a Reserve Bank of India resolution that stipulates a minimum value for Indian shares in privately-held companies, two people familiar with the development said.
The April 2010 RBI resolution, which sought to protect domestic companies from aggressive multinational buyers, mandates that Indian shares in privately-held firms should be valued under the discounted cash flow method. Under this method, Essar's 11% stake in Vodafone Essar is worth $1.8-1.9 billion, compared with the purchase option that pegs it at $1.2 billion.
Vodafone purchased 67% interest in the Indian telco from Hutchison Whampoa and two Indian shareholders Analjit Singh and Ashim Ghosh in 2007 in a $11-billion deal. At that time, Essar and Vodafone agreed that the former could sell its interest in the company to the latter for $5 billion till May 2011.
The agreement was formed in two parts - one a put or sell option for 22% held by the Essar group overseas and the other a call or buy option for Vodafone to buy 11% stake the Essar group held in India.
Essar had the first right to exercise its option, but if it tendered its entire 22%, Vodafone's option would become valid.
The partners had agreed that should only a part of the option be exercised, the value of the stake changing hands would be ascertained by three investment banks, but the amount would be capped at $5 billion if the entire option was exercised.
The options were to expire on May 8, after which both sides would have been forced to negotiate a price, which, industry analysts say, would have been less much than $5 billion. The country's top mobile company, BSE-listed Bharti Airtel, was valued at $33 billion when Vodafone bought a 67% stake in the then Hutchison Essar in February 2007.
Bharti is now valued at around $30 billion, despite adding some 180 million customers since then.
In March, Vodafone said it would purchase Essar's 33% stake for $5 billion as per the agreement. However, the Essar group now plans to argue that since the 11% held in India is being bought by Vodafone it is subject to Reserve Bank regulations.
"We are mindful of the new Reserve Bank of India guidelines and fully expect the current transaction to comply with them," Vodafone group spokesman Simon Gordon said. A spokesperson for Essar declined to comment on the matter citing a confidentiality agreement.
Essar had claimed an additional facilitation fee of $500 million from Hutchison during the latter's negotiations with Vodafone. The group may be able to achieve a similar result with Vodafone too, said an industry analyst.
For Vodafone, much is at stake. It has already locked horns with the Indian tax authorities that claim that the UK-based operator owes the state $2 billion in taxes. The Essar option also will come under similar scrutiny.
"With the Essar group support and the option to set a benchmark, Vodafone's case in the Supreme Court could get a real boost," said an analyst, who asked not to be named.
An Essar official said the amount payable for the domestically-held 11% would be subject to capital gains tax, but not the remaining 22% held in the Mauritius subsidiaries.
Vodafone bought Hutchison's stake through a Cayman Islands company that held shares in a series of Mauritian companies. Given this situation, Vodafone may accept an additional payment to the Essar group as the lesser devil, the analyst said.
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