The Essar Group is believed to have scrapped its plans to inject part of its 33 per cent stake in Vodafone Essar into a listed shell company, according to news reports. Instead, the partners (the Essar Group and Vodafone) have agreed to appoint two investment banks to value the stake in Vodafone Essar, as a precursor to the Essar Group deciding whether to sell it to Vodafone.
Prior to this, the Essar Group was planning to inject 11 per cent of its stake into Indian Securities (ISL), a listed company it controls. It argued 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 per cent stake in Vodafone Essar for $11.1 billion in 2007, it gave the Essar Group Essar a put option over its 33 per cent stake. The first one allows the Essar Group to sell the entire stake to Vodafone for $5 billion.
The second allows the Essar Group to sell between $1 billion and $5 billion worth of Vodafone Essar shares at a fair market value. Essar has until May, 2011 to decide. In the second choice, 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, would be its fair market value plus around $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.
The partners have opted for this valuation process. It is believed that the Essar Group has mandated Standard Chartered and Vodafone has hired Goldman Sachs in this regard.
