Ruias hang up on Vodafone, get $5b

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March 31: British telecom major Vodafone announced on Thursday that it is buying out partner Essar’s 33 per cent stake in their telecom venture for $5 billion. Vodafone Essar is the second largest mobile telecom operator in India with over 100 million subscribers.

In 2007, Vodafone had purchased a controlling stake in the telecom firm which used to be known as Hutchinson-Essar. Post this move, Vodafone will have near total control on the firm, with minority investors holding small bits of equity. At the time of signing the deal, Vodafone had also offered to purchase the 33 per cent stake owned by the Ruia family in the venture for $5 billion — an option which they have now exercised. This option would have expired in May this year. Vodafone expects the final settlement by November 2011.

Essar’s telecom venture is privately owned, and the money will pass on completely to the Ruia brothers — Shashi and Ravi. Mr Shashi and Mr Ravi Ruia have an estimated net worth of $15.8 billion, and figure at number 42 on the global rich list brought out by Forbes. Apart from telecom, they also have a presence in steel, oil and gas, shipping and power. In a statement to the media, the Essar group has refused to comment on the transaction citing confidentiality clauses. While the group hasn’t yet announced any use for these funds, it is expected that the money will be used in the capital intensive businesses such as steel, power and oil and gas.

Earlier this week, Essar group had announced the purchase of an oil refinery in UK for $350million in cash. The group also has interests in Africa, including an oil refinery in Kenya, coal mines and a telecom network. What is not clear at this point is whether this purchase will take Vodafone’s stake past the 74 per cent mark — the maximum that can be owned in telecom sector by foreign shareholders. If that happens, Vodafone will have to bring down its stake. At this point, the structure of the deal is not clear. One possibility is the Vodafone may be making the purchase via subsidiaries where its stake is less 100 per cent. Vodafone is also contesting a tax claim by the Indian government on the 2007 deal.