Vodafone to Buy Additional Essar India Stake for $5 Billion

Vodafone Group Plc (VOD) will buy an additional 33 percent stake in its Indian joint venture for $5 billion after partner Essar Group exercised an option to sell the holding in India’s third-largest mobile-phone operator.

The deal will raise Vodafone’s stake to 75 percent. Essar will exit the company after it implemented a put option over 22 percent of the venture, Vodafone said in a statement today. Vodafone exercised its call option to buy an 11 percent stake.

The deal is a boost for Vodafone Chief Executive Officer Vittorio Colao as Essar failed to gain a higher valuation for part of its stake in Vodafone Essar. Essar, founded by billionaires Shashi and Ravi Ruia, had an option to sell its entire 33 percent stake for $5 billion to Vodafone or to sell a smaller stake at an independently appraised fair market value.

“The advantage for Vodafone is that they don’t have to consider the other shareholder now,” Guy Peddy, an analyst at Macquarie Securities in London, said via phone. “It was expected and was in Vodafone’s numbers.”

Vodafone had already set aside the $5 billion cash payment within its net debt of 30 billion pounds ($48 billion). Vodafone shares dropped 1.9 percent to 176.5 pence in London trading.

The deal will increase Vodafone’s direct equity stake in the venture to 75 percent, spokesman Ben Padovan said via phone. The British company will comply with local rules, he said. India doesn’t allow foreign companies to own more than 74 percent in a local mobile-phone operator.

Disposal

“They’ll have to sell that 1 percent to some Indian entity, or they’ll have to consider an initial public offering,” said Naveen Kulkarni, an analyst with MF Global in Mumbai.

Final settlement of the deal is predicted to be no later than November this year, Vodafone said.

Essar spokesman Rabin Ghosh declined to comment.

Vodafone is increasing its stake in the venture in one of its fastest growing markets. India was one of the “jewels” in the three months through December, Colao said in February.

While Vodafone is expanding in India, it is seeking to exit from French mobile-phone operator SFR. Vodafone holds 44 percent of SFR, while Vivendi, which owns the rest, has said it wants full control of the unit.

Review

Colao, who last year sold Vodafone’s $6.5 billion stake in China Mobile Ltd. in his biggest divestment since he took charge in 2008, is reviewing all the company’s minority interests amid pressure from shareholders to squeeze more out of the investments.

Last year, bankers valued Vodafone Essar at between $13 billion and $18 billion when Essar considered an initial public offering for the Indian venture, one person familiar with the matter said earlier this year. That would have valued Essar’s stake at $4.3 billion to $6 billion.

Vodafone, based in Newbury, England, bought a 67 percent stake in Hutchison Essar for $10.7 billion in 2007. Vodafone’s outlook for India soured a year after its entry, when six new national licenses were awarded.

Vodafone in May took a $3.3 billion charge for the Indian unit, citing “intense price competition.” Vodafone competes against more than a dozen operators in the world’s second- largest market for mobile-phone customers.

Since then, prospects have improved. Vodafone’s service revenue from India increased by 17 percent in the fiscal third quarter. The Indian wireless market is forecast by Stamford, Connecticut-based Gartner Inc. to exceed 993 million users by the end of 2014.

Standard Chartered Plc advised Essar Group on the transaction, and Vodafone used Goldman Sachs Group Inc. UBS AG was hired as a third investment bank to help reach a valuation of the Indian joint venture.

To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net.

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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