Vodafone Group has objected to plans by Essar Group, its Indian joint venture partner, to merge its telecommunications holding company with another listed company, as it could push up the price Vodafone may have to pay later this year to buy out Essar's stake in the joint venture.
Essar on Wednesday, however, questioned Vodafone's entitlement to contest the merger.
Vodafone bought a 67 per cent stake in the mobile joint venture, Vodafone Essar, from Hutchison Telecommunications International in 2007. Essar owns a 33 per cent stake in Vodafone Essar of which 11 per cent is held by Essar Telecommunications Holdings (ETHPL), and the rest through another unlisted company.
Essar now plans to merge ETHPL with a listed group company, India Securities (ISL).
Essar may be using the route to try to "discover" the value of Vodafone Essar, as the mobile joint venture is not listed, some analysts said.
But Vodafone is concerned that the value of ISL could be misinterpreted as a fair market value of Vodafone Essar, it said in a statement late Tuesday.
The Ruia family that runs Essar has been tough to bargain with and tried to maximize its gains ever since 2007 when Vodafone wanted to invest in the joint venture, said Kunal Bajaj, director for India at telecom consultancy, Analysys Mason.
The dispute between the owners of Vodafone Essar over valuation is, however, not going to affect the operations of the company, which are quite independent, Bajaj said.
Under an agreement between Vodafone and Essar in 2007, Essar has an option to sell its 33 per cent share in Vodafone Essar to Vodafone for US$5 billion, or has an option to sell between $1 billion and $5 billion worth of Vodafone Essar shares to Vodafone at an independently appraised fair market trading value.
The option is to be exercised between the third and fourth anniversaries of completion of the transaction, Vodafone said in 2007.
The Essar Group may be trying to get a higher price for the stake in Vodafone Essar, by merging ETHPL with a listed company. But Vodafone thinks that the merger could distort the price.
ISL is a "highly illiquid vehicle" and after the merger over 95 per cent of the shares will be under the control of the Essar Group and two other shareholders, Vodafone said in its statement. Small amounts of buying or selling could distort ISL's share price, it added.
Vodafone has written both to the Bombay Stock Exchange (BSE) and the regulator, Securities and Exchange Board of India. It has also served its objections on Essar's counsel in the Madras High Court where Essar has filed for the merger of ETHPL and ISL.
ISL on Wednesday said in a filing to the BSE that Vodafone is not entitled to object to the merger proposal, as it is neither a shareholder nor a creditor of both ETHPL and ISL.
Vodafone has other problems in India, besides increasing competition in the local market.
The company received a tax demand of 112.2 billion Indian rupees ($2.5 billion) in October from India's Income Tax department in connection with the company's $11 billion payment in 2007 to Hutchison Telecommunications International. In a long-standing dispute, the government has insisted that Vodafone should have collected tax from Hutchison before making the payment, in accordance with Indian rules.
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