There is speculation over an IPO of Vodafone Essar

Mega carrier Vodafone made a surprise move on Thursday, increasing its stake in the holding company behind Indian joint venture Vodafone Essar by buying out its local partner.

Vodafone exercised an option drawn up as part of its 2007 $11.7bn acquisition of Hutchison’s stake in the Indian carrier. Essar had been expected to hold onto its stake as the two had been wrangling for some time over valuation of the Indian operator.

Essar had been claiming that the Big V was trying to take full control of the Indian operator on the cheap, yet on Thursday it appears that Vodafone has paid top whack – $5bn – for Essar’s 33 per cent stake. As a result, Vodafone has increased its majority ownership of the company from 67 per cent to 100 per cent.

The move actually takes Vodafone’s direct holding in the operator to 75 per cent, with the rest held by overseas investment vehicles. But Indian foreign ownership rules limit such direct investment at 74 per cent, so Vodafone will now have to sell one per cent of its stake, with some speculating at an IPO of the business.

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Essar sells Indian cell tower unit

Wireless infrastructure operator American Tower Corporation (ATC) said Wednesday it has agreed to acquire a further 4,450 wireless communications sites in India via the purchase of Essar Telecom Infrastructure.

ATC’s Indian subsidiary, Transcend, will acquire the firm for a total consideration of $430m. The move will almost triple ATC’s presence in India, where it already operates around 2,550 sites. Essar’s site portfolio averages approximately 1.8 tenants per tower, ATC said.

The move comes as no surprise as operators across the Indian mobile industry attempt to drum up funds to participate the country’s forthcoming auction of 3G spectrum.

Last month, India’s biggest communications infrastructure operator, GTL Infrastructure, took over the tower assets of local carrier Aircel in a deal valued at $1.84bn. Under the agreement, GTL will take over 17,500 existing towers and will take over rights to roll out 20,000 more.

Zain and Essar have agreed to share 300 base stations over 15 years in Kenya.

Significantly, this move is almost certainly an indication that Zain will look to strike more infrastructure sharing deals in some of the 21 other countries in the Middle East and Africa where it operates.

And while the Kenya sharing deal is modest, reportedly covering base station running costs, it is a sign that operators in emerging markets are just beginning to look at how combining on infrastructure can save opex.
This will have major significance for all operators in the region, because, like their peers in Europe, it means that they are now beginning to shift their focus from operating networks to selling services.

This extent of this shift in mind-set is clear when it’s remembered that late August a network-sharing deal between Zain Zambia MTN broke down because of fears by the operators that they couldn’t guarantee quality – even though the country’s regulator had strongly recommended sharing to speed up rural network coverage.

Following on from the major infrastructure sharing deal struck by Vodafone and O2 last month, it wouldn’t be surprising to see two regional operators, such as Zain and MTN striking a deal to work together closely on network sharing in the markets where they both operate.

Network and infrastructure sharing has come a long way. A few years ago operators were not only focussed on operating networks; they saw the complications to agreeing the legal aspects of sharing too much of a barrier to enter into deals.

While it’s true that the economic downturn is leading operators to broker deals that may in the past have broken down, the timing of it coincides with the change in operators’ priorities. As such, Zain and Essar’s Kenya sharing deal is a sign of things to come.

The $11bn acquisition of Hutchison’s Indian mobile carrier, Essar, has not been the smoothest of deals for Vodafone.

At the time of the acquisition in May of this year, the carrier took some time to secure regulatory approval. Now, it seems the Newbury-headquartered operator has received two more pieces of bad news in the space of 24 hours.

Voda is looking down the barrel of a $2bn capital gains tax bill. On Wednesday the Bombay High Court ruled to let the Indian government continue investigating the network operator. UK broadsheet, the Financial Times, reported that an additional hearing on the matter is scheduled for December 11. Not surprisingly, the carrier is fighting the claim.

Meanwhile, the Indian government has approved the findings of a spectrum allocation report by the Telecom Engineering Centre. The technical body, which represents the interests of the country’s Department of Telecom, says GSM carriers, such as Vodafone, will need to increase their subscriber base eight fold before they become eligible for an additional tranche of spectrum. In some cases, though, the TEC recommendations are less stringent than those initially set out by the country’s regulator TRAI.

The Cellular Association of India (COAI), which represents the interests of GSM carriers in the country, has challenged the recommendations, which it says favour CDMA-based network operators.

The announcement is the latest problem for Vodafone in its proposed bid for a 57 per cent stake in Essar for $11.1bn (£5.7bn).

The regulators want to extend their consultation period so they can assess whether the current arrangement puts too much control into the hands of the British operator. India has strict rules on foreign investment.

Vodafone remains cautious, saying Friday that it is confident the deal will go ahead.

Under the terms of the partnership, Vodafone will have operational control of the company, to be renamed Vodafone Essar, and Essar will gain proportionate board representation.

Ravi Ruia will be appointed chairman of Vodafone Essar and Arun Sarin will be appointed vice chairman.

The move quashes rumours of a fall out between the two companies, following Vodafone’s $11.7bn agreement last month to acquire Hutchison Telecommunications International Limited’s controlling interest in Hutchison Essar.

Essar will continue to be a 33 per cent shareholder, although the business will eventually market its products and services under the Vodafone brand.

Between the third and fourth anniversaries of completion, Essar will also gain an option to sell its 33 per cent shareholding in Vodafone Essar to Vodafone for $5bn.

Vodafone has already indicated its interest in buying Essar out.

Ravi Ruia, vice chairman of Essar, said: “Essar was a founding partner in Hutchison Essar and played an active role in building the company, including extending network coverage into several profitable regional markets.  By partnering with Vodafone we expect to create further value in the business.”

The Times of India on Wednesday said the two firms have also agreed to rename HEL as Vodafone Essar. It added that the newly formed company would begin selling products and services “under the Vodafone brand in due course”.

Vodafone won its bid to buy a controlling 67 per cent stake in HEL a month ago for $11.1bn (£5.74bn). That stake includes the 52 per cent equity held by Hutchison Telecom and a combined 15 per cent stake owned by two individual Indian investors.

Essar holds the remaining 33 per cent equity in the firm and, it has said repeatedly, has no intention of selling it.

Essar Vice Chairman Ravi Ruia would become non-executive chairman, according to The Times while Sarin would become vice-chairman.

Clinching this deal has been an important win for Sarin who, towards the end of 06, faced difficult questions from shareholders on his strategy for the British operator. With a foothold in the world’s fastest growing mobile market, all eyes will be on Sarin, an Indian by birth, who called the deal “a homecoming”.

The Hindustan Times reported Tuesday that Vodafone will nominate Ravi Ruia, Essar’s group vice chairman, as non-executive chairman, quoting sources.

The Times said the new board would be comprised of nine directors, with three from Essar. Vodafone chief, Arun Sarin, would be vice chairman. 

Vodafone has also agreed to a four-year put option for the Essar group, based on an enterprise value of $18.8bn, according to the Times.

The Indian conglomerate issued a statement late Friday in which it said it sees Hutch Essar “as a core part of its business portfolio for the long term” and “has no intent to exit the company”.

Essar has confirmed that Vodafone has approached the group with regards to a possible partnership over the running of the company and some local press reports state that Essar is open to increasing its existing stake beyond 33 per cent to run the operator on an equal footing with Vodafone.

Vodafone agreed terms with Hutchison Telecoms International (HTIL) to buy out its 67 per cent controlling stake in Hutch Essar for $11.7bn earlier this month.

Vodafone then offered to buy Essar out on the same terms as Hutchison but Essar appears keen to maintain its interest in the company.

In fact, speculation suggests that if Vodafone refuses Essar’s proposal for joint management, Essar may exercise its right of first refusal. This is a much debated option that could allow Essar to buy the 67 per cent stake from HTIL at the same price offered by Vodafone.

However there is some controversy over whether the first right option will stand up in court.