The Ruias of the Essar Group will now be getting around $750 million (about Rs 3,493 crore) more from their telecom joint venture partner, Vodafone Group, over and above the fair market price if they exercise the "put" option for their 33.02 per cent stake.
Three independent sources with direct knowledge of the talks said the revised terms of agreement and the additional "commitment" from Vodafone was agreed a fortnight before, after intense negotiations.
The sources said a loose understanding or an MoU has also been agreed upon by Vodafone and Essar, which soon may get drafted into a contract.
The put option of the Essar Group's stake in Vodafone-Essar expires in May 2011. By the 2007 shareholder agreement between the two, Essar has the "put" option of divesting its stake in the Vodafone Essar telecom venture. But Essar has to exercise that option within the one-year window starting May 8, 2010. Vodafone Essar is a joint venture of British telecom giant Vodafone Group Plc and Essar Group.
By the original contract, said sources, if the "put option" is indeed exercised by Essar, then there will be two ways to determine the value of its holdings in the telecom joint venture.
According to the first option, if Essar decides to sell out entirely to Vodafone, then it gets $5 billion, an amount that is pre-determined, irrespective of the prevailing market price. The second option says if Essar decides to sell its shares worth between $1 billion and $5 billion to Vodafone, then the valuation will be "independently appraised" by independent valuers based on the fair market price.
If Essar indeed opts for the second option, then post the independent valuation to determine the fair market value, it will get an additional $750 million as a 'top up'.
But if Essar has to actually pursue any of the above two options, then it can only do so within May 8, 2010 to May 8, 2011 the put option window which is currently open. A put option is a contract that gives the seller the right, but does not impose an obligation, to sell a specified quantity of securities at an agreed price within a specified time frame.
The decision to revise the floor price, said sources, was triggered by the aggressive bidding by Vodafone for the 3G licences. Vodafone eventually won nine circles, including the four all-important metro circles of Delhi, Mumbai, Kolkata and Chennai, by paying Rs 11,617 crore as the total price.
Sources said there were differences of opinion between the two partners in the 3G bidding strategy and Essar wanted a more conservative approach. Essar's concerns were due to the fact that they felt taking on high leverage on Vodafone Essar's books while pursuing the 3G bids would actually be counterproductive. Especially "during the put option window", as it would depress the equity value of the JV and that in turn would impact the valuation of its 33 per cent stake.
Vodafone, said banking industry sources, had secured a credit line of over Rs 10,000 crore from a consortium of Indian bankers while preparing its war chest for the 3G bids. The banks had also given their assurance hiking the credit lines, if required. However, when contacted, Essar Group's spokesperson told Business Standard: "As a policy, we do not comment on market speculation." Vodafone spokesperson also declined to comment.
Telecom analysts, are surprised at this development as they feel that the argument that 3G related debt burden will depress the equity value of Vodafone Essar can be challenged. "The debt raised for 3G is for a particular reason and in this case it will only add value to the venture. 3G is a value-add," said the national head of telecom practice in a leading consulting firm.
The move has also raised eyebrows in the telecom community with people wondering if this could be read as a signal that Essar is actually planning to exit the venture, if not fully but at least partially.
Essar over the last few months has been restructuring its holdings, which have been scattered over different entities. Sources said, the Ruias own their 33 per cent stake through two firms--11 per cent held by Essar Telecommunications Holdings Pvt. Ltd (ETHPL) and the remaining 22.02 per cent through Mauritius-based Essar Telecom India Ltd, another company owned by promoters.
Plans have been on to merge ETHPL with a listed Essar group entity, India Securities Ltd (ISL), so that ISL shareholders get the benefit of any upside. The Ruias own a little over 74.22 per cent of ISL. The current foreign direct investment guidelines allow foreign entities to own only up to 74 per cent in a telecom firm. Essar has in the past monetized some portions of the put option by offering part of its stake in Essar Telecom as collateral to bondholders to raise $900 million.
