Vodafone wins ground in Indian jv tussle: Sources

Indian mobile phone operator Essar has abandoned plans to inject part of its 33 percent stake in the Vodafone Essar venture into a listed shell company after objections by its partner Vodafone, according to two people familiar with the situation.

London: Indian mobile phone operator Essar has abandoned plans to inject part of its 33 percent stake in the Vodafone Essar venture into a listed shell company after objections by its partner Vodafone, according to two people familiar with the situation.

Instead, the partners have agreed to appoint two investment banks to value the stake in the Indian mobile operator as a precursor to Essar deciding whether to sell it to Vodafone.

Essar was previously planning to inject an 11 percent stake into Indian Securities (ISL), a listed company it controls. It argued that this would reveal its true value.

Vodafone saw this as an attempt to artificially inflate the stake's value as a precursor to selling it, arguing that ISL was a highly illiquid vehicle.

When Vodafone acquired a 67 percent stake in Vodafone Essar for USD 11.1 billion in 2007, it gave Essar two put options over its 33 percent stake. The first allows Essar to sell the entire stake to Vodafone for USD 5 billion. The second allows Essar to sell between USD 1 billion and USD 5 billion worth of Vodafone Essar shares at a "fair market value". Essar has until May to decide whether to exercise the options.

Under the second option, fair market value is supposed to be determined by two investment banks, one appointed by each partner. If the two banks don't agree, a third investment bank would be appointed to adjudicate. The value paid by Vodafone, under this option, would be its fair market value plus around USD 700 million to take account of the fact that Vodafone Essar is carrying extra debt as a result of its push into 3G mobile technology.

It is this valuation process that the partners have now inaugurated.

After Essar said it planned to inject its stake into ISL, Vodafone complained to the Indian court that the merger documents for the deal were not clear. It also complained to the Bombay Stock Exchange that there were oddities in ISL's valuation. Essar decided to go down the route of appointing investment banks after concluding that fighting these complaints would take too long given the May deadline, according a person familiar with its thinking.

An Essar spokesman based in Mumbai denied that a decision had been taken. Vodafone declined to comment.

Bureau Report

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