Vodafone to pay $5 billion for buying out Essar in India; company could consider IPO in India

Vodafone, the world’s largest mobile operator by revenue, is to pay $5 billion in cash to buy out Essar Group from their Indian joint venture and bring an end to their increasingly fractious relationship.

Vodafone, which has faced a host of problems since entering the fiercely competitive market in 2007, will take over Essar’s 33 per cent of the Vodafone Essar Limited company, giving it direct ownership of 75 per cent of the Indian operator.

The move will however put Vodafone above the 74 per cent limit that foreign companies are allowed to own in India, meaning it will have to sell just over 1 per cent.

A spokesman for the British firm said it could also consider an IPO in the future.

The announcement brings to an end a difficult relationship that had become increasingly strained and public in recent months.

Vodafone paid $11.1 billion in 2007 for control of the carrier in what remains the largest foreign direct investment to be completed in India.

With 771 million mobile subscribers as of January, India is the world’s second-biggest market formobile services and it is also the fastest-growing with the industry’s monthly additions averaging 19 million in 2010.

Vodafone also said that final settlement is anticipated to be completed by November, 2011.

Sources in the know said that the completion of deal would be subject to meeting certain conditions which include Reserve Bank of India’s permission as well as valuation of the deal.

The final shareholding pattern post this deal was not provided by the company as it was not clear whether Vodafone’s stake would exceed the 74 per cent FDI limit.

But Vodafone has faced many challenges, from high spectrum costs, an ongoing dispute over tax and an increasingly difficult relationship with its main partner, meaning its experience is often cited as a cautionary tale for foreign players in Asia’s third-largest economy.

It took a charge of 2.3 billion pounds ($3.70 billion) in May 2010 due to the fierce levels of competition and escalating spectrum costs and signalled its increasing frustration with the country.

The owners of India’s third-biggest mobile carrier also clashed themselves in recent months over how Essar should hold its stake, as it wanted to merge a firm that owned an indirect 11 per cent with another Essar firm.