IHS Global Insight Perspective | |
Significance | Vodafone has agreed on a conclusive deal with Essar. |
Implications | The UK-based group will end up with a 74% stake in Vodafone Essar. |
Outlook | Several weeks from now, it may, however, face a multi-billion dollar tax bill. |
Vodafone has issued a press release with the details of a final agreement with Essar. Under the terms of the deal:
- Essar Communications (Mauritius) Limited (ECML) and Essar Com Limited (Ecom) have sold their 22% shareholdings in Vodafone Essar Limited (VEL) to Vodafone. This was done in two tranches on 1 June and 1 July 2011. Vodafone paid GBP2.07 billion (USD3.33 billion) net on withholding tax of GBP0.88 billion
- ETHL Communications Holdings Limited (EHTL) will sell its 11% stake in VEL.
- Vodafone and the Essar entities have agreed to terminate and renounce all outstanding and future claims and work together to get regulatory approval for these transactions.
- ECML and ECHL's contractual rights in respect of VEL under their prior agreements with Vodafone have ended and ECML and ECHL no longer have board seats in VEL.
- GBP0.79 billion will be paid by Vodafone to ECHL for the 11% stake and the settlement of all shareholder claims. This payment will be completed by 15 February 2012. Vodafone said that it expects to sell a 1.35% stake in VEL to an Indian investor to remain within the 74% foreign investment cap.
Outlook and Implications
Part One Over: Disputes between strategic shareholders are unfortunately common in the telecoms industry, particularly when one shareholder is seeking to extract value. Vodafone will be therefore relieved that its differences with Essar appear to be over and it can focus on the business of developing its mobile broadband business and competing in a highly competitive mobile voice market. Vodafone's Indian operations, accounted for 37.8% of the group's 347.7 million proportionate mobile subscribers at the end of March 2011. The contribution to group revenue, earnings before interest, tax, depreciation and amortisation (EBITDA), and free cash flow in the year to 31 March 2011 was significantly lower, at 8.4%, 6.7% and 4.4% respectively.
And Now for the Decision on Tax: Vodafone now must wait for the outcome of a court case that may result in a USD5 billion tax charge. It is significant that Vodafone paid withholding tax on the above-mentioned transactions, despite its claim that no tax was due. Recent comments by the group's CFO Andy Halford suggest that the UK-based group would not be surprised if it ends up having to pay USD5 billion in withholding taxes and charges, despite an emphatic denial that it was liable to them on its acquisition of an initial stake in the Indian operator in 2007. Halford suggested that Vodafone will not walk away from India if the result goes against it, but it may have to slow capex in India (see India: 01 July 2011: Vodafone CFO Warns on Indian Tax Risks).