March 31: Vodafone Plc has agreed to pay $5 billion (Rs 22,500 crore) to buy out the Ruias-controlled Essar group’s 33 per cent stake in their Indian joint venture.

It will rank as the sixth biggest on India’s frenetic Deal Street, which reported mergers and acquisition transactions worth over $62 billion in 2010, an increase of 159 per cent over the previous year.

The Ruias will finally exit the telecom entity they had helped establish in 1995 and ran with at least three partners — Swiss Telecom, Hong Kong tycoon Li-Kashing’s Hutchison Whampoa, and finally Britain’s Vodafone.

The deal will leave Vodafone with a 75 per cent stake in Vodafone Essar — one percentage point higher than the limit placed on foreign ownership of a telecom company. The UK-based mobile group will need to offload a little over 1 per cent to an Indian investor to comply with the regulations. “We will remain within the FDI threshold,” said Vodafone spokesman Ben Padovan.

At present, Vodafone has a 42 per cent stake in India’s third-biggest mobile service provider that reported a subscriber base of 771 million in January. Another 25 per cent is held by Indian partners, including Analjit Singh of the Max group and IDFC.

The Ruias’ 33 per cent stake in Vodafone Essar was held by overseas and local entities. Under a layered shareholding structure, 22 per cent was held through two entities based in Mauritius, while 11 per cent was parked with an Indian entity called ETHL Communications Holdings.

The deal has, therefore, been struck with both Vodafone and the Ruias exercising their call and put options enshrined in an agreement reached in 2007 soon after the UK-based mobile operator struck a deal with Hutchison to buy out its controlling 67 per cent stake for $10.9 billion.

“The Essar group has exercised its underwritten put option over 22 per cent of Vodafone Essar Ltd. Following the exercise by the Essar group of its put option, Vodafone has exercised its call option over the remaining 11 per cent of VEL owned by the Essar group, resulting in a total cash payment of $5 billion,” Vodafone Plc said in a statement.

A call option gives an investor the right to buy a stock at a specified price within a specified time frame. A put option gives the owner — in this case, the Ruias — the right to sell the stock at a specified price within a specified time. Under the terms of the 2007 agreement, the Ruias could exercise their put option till May 8. The Ruias are expected to use a part of the stake sale proceeds to pay off a $3.6-billion debt they had raised against guarantees linked to a $3.8-billion valuation ascribed to the 22 per cent stake held by the group’s overseas subsidiaries.

Arm-twisted

The Essar group seems to have arm-twisted Vodafone into paying $5 billion for the stake, which was the maximum amount payable under the terms of the 2007 agreement.

Some analysts have said the stake was worth no more than $3 billion. In January, investment banker JP Morgan had valued the Essar stake at only $2 billion.

The Ruias have had an acrimonious relationship with both its partners — the Hutchison group and Vodafone. Earlier this year, the Ruias had initiated a move to secure a proxy market valuation of its holding in Vodafone Essar through a reverse merger of ETHL Communications Holdings Ltd with another Ruia group company India Securities, which focuses on project finance and intermediation services and is listed on the Bombay Stock Exchange.

The move was seen as an attempt to introduce a new element into any independent valuation of the Ruias’ stake in Vodafone Essar before the put option became exercisable.

Vodafone had tried to block the reverse merger and even filed a suit in the Madras High Court which is still pending. Today’s deal means the two joint venture partners have resolved all their differences amicably.

Vodafone Plc has a group net debt of $53.59 billion and has already factored in the $5 billion payment.

Income tax department officials said they were studying the Vodafone-Essar deal

Income tax department officials said they are studying the Vodafone-Essar deal and will notify the tax implications, if any, to the concerned parties.

“We don’t believe that a withholding tax is due on this transaction,” said the Vodafone spokesman. “We are of the view that it falls under the Indo-Mauritian tax treaty. We have however approached the Authority for Advanced Rulings (AAR).”

Vodafone is already battling a $2.6 billion tax claim related to its $10.9 billion buyout deal with Hutchison.

Finance ministry sources said the completion of deal would be subject to approvals from the Foreign Investment Promotion Board and the Reserve Bank of India.

“The final settlement is expected by November,” said the Vodafone’s statement.