Essar's exit wil allow Vodafone to take crucial decisions without intervention

MUMBAI: It’s been a rocky ride for the two partners with the latest fissures in the Vodafone Essar joint venture surfacing in January this year over the valuation of Essar’s stake in the JV. This is not the first time their relationship has run into rough weather. In the past as well, the Ruias led group had wanted joint control in the telecommunications JV but later agreed to the British firm taking full charge of the operations. Once an Essar official had described the ongoing spat as "a fight between a married couple" but post Thursday’s announcement, it’s certain the couple is headed for a divorce.

The latest row between the partners erupted when Essar embarked on the reverse merger of Essar Telecom Holdings (ETHL) into its listed group firm, India Securities. Essar started the process as a price discovery move with the cut off date for the put option being May 8.

ETHL holds a part (11%) of the Essar stake in the JV. Vodafone had then said it was concerned that such a move could distort the valuation of the JV and that the value of ISL could be misinterpreted as a fair market value of Vodafone Essar.

A telecom analyst without wanting to be named said, "With Essar exiting the JV, what it means is that Vodafone is free to make crucial decisions without intervention from a partner which has vital shareholder rights." Essar with four board members had veto powers on any Vodafone plan involving expenditure of over $50 million and the right of first refusal over its partner’s stake, which is mutual.

In fact, there were talks of Vodafone pushing for a new agreement, including crucial changes in shareholder rights with Essar, if the latter decides to only part sell its stake in the JV.

TOI had reported in its edition dated January 31, 2011, that Vodafone was looking to strike a new agreement in which Essar’s rights could be diluted, irrespective of how much stake the latter continues to hold. Vodafone’s Italian CEO Vittorio Colao wants more flexibility in dealing with the local partner given their troubled history.

Essar’s relationship had not been the same with Vodafone after its former CEO, India-born Arun Sarin, left the company over two years ago. It was under Sarin that Vodafone acquired 67% stake in Hutchison Whampoa for $11 billion in 2007, where the Ruias held the remaining 33%.